A variable annuity combines professionally managed investments with insurance guarantees. You contribute either a single premium or several deposits to stock- and bond-based sub-accounts. Account value grows tax-deferred and, when you are ready, converts to a payout that can last for life. Optional riders can protect principal, boost guaranteed income, or help cover long-term-care expenses.
Why investors consider variable annuities
| Question | Concise Answer |
|---|---|
| Main purpose | Market growth plus lifetime-income potential |
| Typical premium | $100,000 and up |
| Payout timing | Ordinary (end-of-period) or due (start-of-period) |
| Tax treatment | Growth deferred, earnings taxed only at withdrawal |
| Liquidity | Annual free withdrawal; larger sums may face surrender fees |
| Style | Income Start | Example |
|---|---|---|
| Deferred | 5–15 years after funding | Contribute $250,000 at 55, begin income at 67 |
| Immediate | Within 12 months | Contribute $300,000 at 68, receive income right away |
| Cost Component | Typical Range | Purpose |
|---|---|---|
| Mortality & expense fee | 1.0 – 1.3 % | Insurance guarantees |
| Fund expenses | 0.5 – 1.2 % | Underlying investment management |
| Rider charge | 0.6 – 1.1 % | Lifetime-income or LTC benefits |
| Surrender fee | 7 % → 0 % | Declines over 7–9 years |
Morningstar’s research report “Variable Annuity Landscape” details industry-wide fees and crediting trends.
| Concept | Formula / Meaning | Fast Example |
|---|---|---|
| Present value | PV = P × [1 – (1 + r)^-n] / r | $500k PV supports future payouts |
| Future value | FV = P × [(1 + r)^n – 1] / r | $250k grows to $475k in 10 yrs at 7 % |
| Ordinary annuity | Pay at period end | Check arrives each month-end |
| Annuity due | Pay at period start | First check arrives immediately |
Long-term upside may beat fixed guarantees, balanced by higher volatility and fees.
Most contracts allow up to a dozen free transfers each year
Diversify among insurers rated A or better. The NAIC Buyer’s Guide lists state guaranty limits, generally $250,000 per owner per company.
A variable annuity can capture market growth, defer taxes, and deliver lifetime income when paired with the right rider. By studying rate sheets, understanding fee layers, and applying payout formulas, you can judge whether this contract belongs in your retirement strategy. Partner with a fiduciary adviser to align the annuity with your income goals, tax picture, and legacy plan.
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