Understanding Variable Annuities: Key Points to Know

A variable annuity is an insurance contract where premium dollars are invested in sub-accounts that function similarly to mutual funds. The account value rises or falls based on market performance, so principal is not guaranteed. It can provide tax-deferred growth and optional lifetime income features, but it also may include surrender charges, rider fees, mortality and expense charges, and investment risk.

Variable annuities are generally suited for clients with higher risk tolerance, longer time horizons, and a solid base of guaranteed income from Social Security, pensions, fixed annuities, or fixed indexed annuities. They are typically not the first choice for conservative retirees who need principal protection. They may be more appropriate as a supplemental growth-oriented vehicle inside a broader retirement plan.

Important fees include mortality and expense charges, administrative fees, sub-account expenses, surrender charges, and optional rider fees. Living benefit riders may add meaningful annual costs, often charged against an income base or contract value. Because total costs can reduce long-term growth, Brokerage Consulting reviews the fee structure before helping clients decide whether the contract’s benefits justify its expense.

Yes. Unlike fixed annuities or many fixed indexed annuities, variable annuity account values fluctuate with the performance of selected sub-accounts. Poor market performance can reduce the account value and may result in loss of principal. Some optional riders may provide income guarantees, but those guarantees are subject to contract terms, fees, withdrawal rules, and the claims-paying ability of the issuing carrier.

These are optional living benefit riders that may add protection or income features. A GLWB can provide guaranteed lifetime withdrawals, a GMIB may guarantee a future income benefit, and a GMAB may guarantee a minimum accumulation value after a set period. Each rider has specific rules, fees, and limitations, so the value should be compared carefully against its long-term cost.

A 1035 exchange allows an existing annuity to be transferred into another annuity contract without triggering current taxation on gains, provided IRS requirements are met. It may be useful when an older variable annuity has high fees, weak riders, or poor suitability. However, surrender charges, new surrender periods, and lost benefits must be reviewed before making any exchange decision.

No. Variable annuities are designed as long-term retirement and tax-deferred accumulation vehicles, not short-term investments. They may include surrender charges, tax rules, market risk, and rider limitations that make early withdrawals costly. Investors should consider liquidity needs, emergency reserves, time horizon, and whether lower-cost investment alternatives may accomplish similar growth objectives with fewer restrictions.

Brokerage Consulting helps clients evaluate whether a variable annuity fits their overall retirement income strategy. The review can include contract costs, sub-account exposure, rider guarantees, surrender schedules, tax considerations, and possible 1035 exchange alternatives. Ken Orenstein also compares variable annuities against fixed, fixed indexed, deferred, and immediate annuity strategies when appropriate.