Variable annuities offer tax-deferred growth and market-based returns—but with higher risk and fees. Learn when (and if) they’re worth it.
What Is a Variable Annuity?
A Variable Annuity is a contract with an insurance company that allows you to invest in a range of sub-accounts—similar to mutual funds—while deferring taxes on investment gains. Unlike fixed or indexed annuities, your principal is not protected.
That means your balance may grow—or shrink—depending on market performance.
---🔍 Where It Fits Among Other Annuities
| Type | Growth Style | Principal Protection | Risk Level |
|---|---|---|---|
| Fixed Annuity | Guaranteed Rate | ✅ Yes | Low |
| Indexed Annuity | Linked to S&P 500 (Capped) | ✅ Yes | Low–Moderate |
| Variable Annuity | Sub-accounts (like mutual funds) | ❌ No | High |
📈 Example: $100,000 in a Variable Annuity
Let’s say you invest $100,000 in a variable annuity sub-account that mimics the stock market:
- Market return over 10 years: 7% annually
- Annual fees (M&E + investment fees + riders): ~2.8%
Net return = 4.2%
Ending value: $100,000 → ~$150,700 after 10 years (vs. ~$196,700 if fees were zero)
Key takeaway: Fees can eat into growth significantly.
---✅ Variable Annuity Pros
- 📈 Tax-deferred growth: No taxes on capital gains or interest until withdrawn
- 📊 High return potential: Choose aggressive or conservative sub-accounts
- 🛡️ Optional income riders: Can add lifetime income or death benefit guarantees
- 📁 Estate planning features: May include enhanced death benefits
⚠️ Variable Annuity Cons
- 📉 Market risk: No principal protection—values can decline
- 💸 High fees: M&E, admin, investment, rider fees can total 2–4% per year
- 🔒 Surrender charges: Early withdrawals may incur fees for 5–10 years
- 📋 Complex contracts: Riders and options make these hard to understand
💡 When Does a Variable Annuity Make Sense?
Most investors may be better off using tax-efficient ETFs or mutual funds in a brokerage account. But there are scenarios where VAs shine:
- 👔 High-income investors: Tax deferral helps avoid paying high ordinary income rates on CD/bond income
- 💼 Maxed out other retirement accounts: No more room in 401(k) or IRA? A VA can offer tax-deferred growth
- 🧾 Want guaranteed income: Riders can create pension-like income with step-ups
📎 Fee Breakdown Example
| Fee Type | Typical Range |
|---|---|
| Mortality & Expense (M&E) | 1.0%–1.5% |
| Admin/Contract Fees | 0.10%–0.25% |
| Sub-Account Fees | 0.5%–1.5% |
| Riders (Optional) | 0.75%–1.25% |
🧠 Final Thoughts
- 📌 Variable annuities are complex and often oversold
- 📌 They may offer value to high-income earners or those needing guaranteed lifetime income
- 📌 Always compare fees vs. benefits—and ask if a simple brokerage account would work better
