Considerations for Variable Annuities

When you invest in a variable annuity, you trade off the guarantees that fixed annuities offer for the chance at a higher rate of return. As a result, you take on a degree of market risk that traditional annuities do not have. Investors are willing to take the risk because the return on variable annuities is likely to outperform that of fixed annuities and other low-risk investments. And, variable annuities are more likely to provide inflation protection than fixed annuities.

While there is some greater risk, at least the risk of the insurance company defaulting on the annuity is quite low—and the separate accounts are not subject to the claims of the company's creditors, the way general accounts can be. Further, your earnings are tax-deferred until the payout period.

Of course, all annuities (with the exception of refund and term certain annuities) involve sharing mortality risk with the insurance company. The insurance company knows a certain percentage of its annuitants will die before the company pays out the full value of their premiums and investment earnings. On the other hand, a long life can be worth lots of money to the annuitant. To cover this risk and that of expense guarantees, the company attaches more charges to a variable annuity than would be found on some other investment opportunities.

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