Variable Annuities

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Variable Annuities

Variable annuities let you invest in portfolios called sub-accounts, whose performance affect the growth and payout of your annuity. In addition, variable annuities have optional living benefits and death benefits.


Variable annuities allow you to invest as little or as much as you can similar to retirement plans like IRAs. These funds are compounded tax-deferred over time, but differs from fixed annuities in that the rate of growth is determined by the portfolios you select.

These annuities can have as many as 40 or more choices, with ten or more managers. Switching between sub-accounts is generally free and non-taxable. Your choice of sub-accounts can include:

  • Government bond funds
  • Guaranteed fixed accounts
  • Money market funds
  • Small cap, mid cap, or large cap investments
  • Capital appreciation investments
  • Domestic or international funds
  • Specialty funds
  • Sector funds

Variable annuities also offer optional living benefits and death benefits, unlike mutual funds. Examples of living benefits include the Guaranteed Minimum Income Benefit, which can guarantee at least a 5% return over seven years or the highest anniversary value, whichever is greater.

Death benefits allow your annuity’s total premiums to pass on to your beneficiaries upon your death. Most annuities that offer this step up on its anniversaries, so that your beneficiary is guaranteed the highest value at any anniversary or the compounded growth of 5% to 7% annually, whichever is greater.


Funds in a variable annuity can have a better chance than fixed annuities at keeping up with inflation. If the market is on the upside or the portfolios you select do well, your annuity capital grows correspondingly. There’s no limit to how much you can invest in a variable annuity, unlike IRAs and 401(k)s.

The optional death benefits can also protect your heirs, while the living benefits can guarantee a predictable income no matter how the market performs.


There’s an inherent investment risk in a variable annuity: if your chosen sub-accounts fare poorly, your payouts will be lower.

Taxes and fees also decrease the returns you get from a variable annuity. Though funds grow tax-deferred, withdrawing gains from stock and bond sub-accounts are taxed as ordinary income, which can be hefty if you’re in a high-income bracket. Annual fees can total as much as 2% to 3% per year, while sales commissions are usually around 4%.


If you’ve maximized (or soon will) your contributions to your IRA or 401(k) for the year, a variable annuity can boost your retirement savings. Still, you might want to check out index funds, tax-managed funds and other tax-advantaged investments and compare costs and gains.

Variable annuities are great for those who want more control over their investments, and are looking for better potential payouts compared to what fixed annuities offer.

It’s recommended to look for variable annuities with lower annual fees and skip on options that could cut into your capital’s long-term growth.

NEXT: Annuities with or without withdrawal penalties