Comprehensive Information on Variable Annuities: Features, Benefits, Risks, and Leading Providers

Variable annuities are long-term financial products designed to help individuals accumulate assets for retirement and provide a stream of income during retirement years. Unlike fixed annuities, which offer a predetermined payout, variable annuities give contract holders the ability to invest in a selection of underlying portfolios, often comprised of mutual funds. This investment flexibility can result in higher returns, but also exposes the investor to market risk. The value of a variable annuity fluctuates based on the performance of the chosen investment options, making it a suitable choice for those who are comfortable with some degree of risk in exchange for the possibility of greater growth. In addition to investment options, variable annuities often come with a range of optional features, known as riders, that can provide guaranteed income, death benefits, or other protections. Understanding the mechanics, benefits, and potential drawbacks of variable annuities is essential for anyone considering them as part of their retirement strategy.

How Variable Annuities Work

At their core, variable annuities are contracts between an individual and an insurance company. The contract holder makes either a lump sum payment or a series of payments to the insurer. In return, the insurer agrees to make periodic payments to the contract holder, either immediately or at a future date. The funds contributed are allocated among a selection of investment options, typically sub-accounts that resemble mutual funds. The value of the annuity contract will rise or fall depending on the performance of these investments.

Variable annuities generally have two phases:

• Accumulation Phase: During this period, the contract holder makes contributions and allocates them among the available investment options. The value of the annuity grows tax-deferred, meaning taxes are not owed on earnings until withdrawals are made.
• Payout Phase: At a chosen date, the contract holder can begin receiving income payments, either as a lump sum or as a series of payments over time. The amount received will depend on the performance of the investments, the payout option selected, and any riders attached to the contract.

Key Features of Variable Annuities

• Investment Flexibility: Contract holders can choose from a variety of investment options, allowing for a customized approach based on risk tolerance and financial goals.
• Tax-Deferred Growth: Earnings within the annuity grow tax-deferred, allowing for potentially greater accumulation over time compared to taxable accounts.
• Optional Riders: Many providers offer riders for an additional fee, such as guaranteed minimum income benefits, death benefits, or long-term care benefits.
• Lifetime Income: Variable annuities can be structured to provide a stream of income for life, helping to address longevity risk.

Benefits of Variable Annuities

• Potential for higher returns compared to fixed annuities, due to exposure to market-based investments.
• Ability to tailor investments to individual risk profiles and goals.
• Tax-deferred growth can enhance long-term accumulation.
• Optional features can provide additional security for retirement income or beneficiaries.

Risks and Drawbacks

• Market Risk: The value of the annuity can fluctuate based on the performance of the underlying investments, potentially resulting in loss of principal.
• Fees and Charges: Variable annuities often come with higher fees than other investment vehicles, including mortality and expense risk charges, administrative fees, investment management fees, and rider costs.
• Surrender Charges: Withdrawing funds early may result in surrender charges, which can reduce the value of the investment.
• Complexity: The range of features and options can make variable annuities difficult to understand without careful research.

Comparison Table: Leading Variable Annuity Providers

Types of Variable Annuity Riders

• Guaranteed Minimum Income Benefit (GMIB): Ensures a minimum level of income regardless of investment performance.
• Guaranteed Minimum Death Benefit (GMDB): Provides a guaranteed payout to beneficiaries if the contract holder passes away.
• Guaranteed Minimum Withdrawal Benefit (GMWB): Allows the contract holder to withdraw a set percentage of the principal annually, even if the account value drops.

Costs and Fees Explained

Variable annuities typically have several layers of fees. These may include:

• Mortality and Expense Risk Charge: Covers the insurance risks and administrative costs, usually ranging from 1% to 1.5% per year.
• Investment Management Fees: Each investment option has its own management fee, often between 0.5% and 1.5% annually.
• Rider Fees: Optional features such as income guarantees or enhanced death benefits come with additional charges, typically 0.5% to 1.5% per year.
• Surrender Charges: Early withdrawals may be subject to surrender fees, which often decrease over time.

Who Should Consider a Variable Annuity?

Variable annuities can be suitable for individuals who:

• Are seeking tax-deferred growth for retirement savings
• Desire investment flexibility and are comfortable with market risk
• Want to secure a stream of income in retirement
• Are interested in additional features such as income guarantees or death benefits

Important Considerations Before Purchasing

• Evaluate your risk tolerance and investment goals.
• Compare fees and features across providers.
• Understand the terms and conditions of optional riders.
• Consider the impact of surrender charges and withdrawal restrictions.
• Consult with a licensed financial professional to assess suitability.

References

• FINRA
• U.S. Securities and Exchange Commission
• National Association of Insurance Commissioners
• Prudential Financial
• Jackson National Life
• Allianz Life
• Lincoln Financial Group
• Brighthouse Financial