Variable Annuity
A variable annuity is an insurance contract where payouts depend on the performance of underlying investments chosen by the contract owner, offering growth potential with market risk.
Exam Tip
Variable annuity = SECURITIES (needs Series 6 or 7). Separate account = investor bears risk.
What is a Variable Annuity?
A variable annuity is an insurance product that combines tax-deferred growth with investment options. Unlike fixed annuities, returns are not guaranteed and depend on the performance of the investments you select.
Key Features
| Feature | Description |
|---|---|
| Separate Account | Investments held separately from insurer's assets |
| Subaccounts | Similar to mutual funds |
| Death Benefit | Minimum guaranteed to beneficiaries |
| Living Benefits | Optional riders for income guarantees |
Fees in Variable Annuities
| Fee Type | Typical Range |
|---|---|
| Mortality & Expense (M&E) | 1.0% - 1.5% annually |
| Administrative Fees | 0.1% - 0.3% annually |
| Subaccount Expenses | 0.5% - 2.0% annually |
| Surrender Charges | 7% decreasing over 7 years |
| Rider Fees | 0.5% - 1.5% for optional benefits |
Important Considerations
Pros:
- Tax-deferred growth
- No contribution limits
- Death benefit protection
- Optional guaranteed income riders
Cons:
- High fees compared to other investments
- Surrender charges for early withdrawal
- Gains taxed as ordinary income (not capital gains)
- Complex products
Regulatory Requirements
Variable annuities are securities AND insurance products. Sellers must have both:
- State insurance license
- FINRA securities license (Series 6 or 7)
Study This Term In
Related Terms
Annuity
InsuranceAn annuity is an insurance contract that provides a stream of income payments, typically for retirement, in exchange for an initial lump sum or series of payments.
Mutual Fund
SecuritiesA mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.