Want to know how a variable annuity works and if it's a good idea to buy one?

We asked the Securities and Exchange Commission for answers to basic questions.


We know: All About Variable Annuities

What's a variable annuity?

A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.


The value of your variable annuity will depend on the performance of the investment options you choose, such as mutual funds, bonds, or money markets.

How does a variable annuity differ from a mutual fund?

Variable annuities differ from mutual funds in several important ways:

  • Variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.
  • Variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount.
  • Variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money.

How does a variable annuity work?

A variable annuity has two phases: an accumulation phase and a payout phase.

  1. During the accumulation phase, you make purchase payments, which you can allocate to various investment funds. The value of your annuity will increase or decrease over time, depending on the performance of the funds. Also, you may be able to allocate part of your purchase payments to a fixed account.
  2. At the beginning of the payout phase, you may receive your purchase payments plus investment income and gains (if any) as a lump-sum payment, or you may choose to receive them as a stream of payments at regular intervals (generally monthly).

Are there fees and charges when I buy an annuity?

Absolutely. Be sure you understand what they are, and how much they're costing. Have these costs explained to you, and don't pay for things you don't need.

What else should I keep in mind about variable annuities?

Variable annuities are designed to be long-term investments, to meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. Variable annuities also involve investment risks, just as mutual funds do.



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