Variable Annuity

Example

“Lisa's variable annuity grew to $180,000 during the bull market, but fell to $145,000 during the market downturn because her returns were tied to stock market performance.”

Memory Tip

Variable = Varies with the market - your returns go up and down with investment performance, unlike fixed annuities.

Why It Matters

Variable annuities offer tax-deferred growth potential and guaranteed death benefits, making them attractive for retirement planning. However, their complex fee structures and market risk require careful consideration, as high fees can significantly impact long-term returns even when investments perform well.

Common Misconception

Many people think variable annuities guarantee they won't lose money or that they're simple investment products. In reality, variable annuities carry market risk and can lose value, and they're complex insurance products with multiple layers of fees, surrender charges, and tax implications that differ from direct mutual fund investing.

In Practice

David invests $50,000 in a variable annuity at age 55, choosing aggressive growth subaccounts. His annual fees total 2.8% including management, mortality, and administrative charges. Over 10 years, his investments earn an average 8% annually, but after fees, his net return is 5.2%. His account grows to $82,100, compared to $107,950 if he had invested directly in similar mutual funds with 0.5% fees earning the same gross returns.

Etymology

Variable annuities were developed in the 1950s as insurance companies sought to offer products that could keep pace with inflation, combining insurance features with investment flexibility.

Common Misspellings

Related Terms

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Other insurance terms you should know

See Also