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Imogene LewisBroderick
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Published on 1/23/2014
For additional information  Click Here


Like the fixed and fixed indexed equity annuity, a variable annuity is a policy contract between an annuitant and an insurance company, into which the annuitant makes either a lump-sum or series of variable periodic payment over a fixed period that is designed to allow the annuitant to accumulate retirement income.

Variable annuities serve largely to hedge against inflation, and are considered variable because an annuitant could receive varying rates of return on the funds paid into an annuity.


There are three main characteristics of a variable annuity, namely:

Underlying Investment: The underlying investment is the payments, whether lump-sum or installment, that the annuitant invest into the variable annuity and is invested in the Separate account of the insurer.

Interest Rate:  A variable annuity provides a guaranteed return for the life of the annuity in addition to extra returns depending on performance of the investment portfolio.

License Requirements: Because a variable annuity is invested into equity securities and is regulated by the Securities Exchange Commission (SEC) alongside a state insurance regulation. Agents seeking to sell variable annuities must hold a securities license and properly register with FINRA, in addition to a life insurance license.


The variable annuity premium is invested in investment vehicles like stocks and mutual funds.  These investment types expose the annuitant to the risk of variable payments that cannot be predicted from one payment period to the next, but could, on the other hand offer a much larger potential financial reward.


A 50 year old male invest $30,000 into a variable annuity contract, on which the insurance company promises guaranteed principal, minimum rate of 5%, living benefit and death benefit. In year one and two, the annual returns were 22.36% and 17.47%, respectively. These rates would be applied to the annuity, increasing the account value $36,109 and $42,416, respectively. In the third year, the annual return is (7.26%). Because the insurer promised a guaranteed return of 5%, regardless of the (7.36%) negative market return in year three, the insurer must increase the annuitant by a minimum of 5%. This would make account value $39,339. If annual return moves in a positive direction in the ensuing year, the account value will continue to change by the higher rates.


If the variable annuity is not an immediate annuity, there will be a waiting
period to annuitize the annuity. This waiting period could be as much as seven years. If an annuitant fails to wait for the seven years restriction, it could cost the annuitant a chunk of the initial premium.  The penalty rate varies from one insurance company to the next, but could be as high as 8% in the first year and declines each year until year eight, when the penalty will no longer be charged.




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