What is a Variable Annuity?

The variable annuity has been the most popular type of annuity in the United States for a very long time. Annuity haters will claim that it’s because of the high built-in (i.e hidden) commissions…and they might be right to a point, but that’s not the entire story.

Back in the 1950s, variable annuities were introduced for tax-deferred growth. That was important back then and is still important today when using non-qualified (i.e. non-IRA) money. Eventually the IRS will get their share of taxes when you pull money out of a variable annuity, but pure tax-deferred growth is a benefit proposition that only deferred annuities (like variable, indexed, and fixed) offer.

Inside of variable annuities are what the industry refers to as separate accounts. Me and you call them mutual funds. Regardless, those separate account choices provide the potential market type growth that attracts many people to the variable annuity platform. On a side note, it’s important to know that variable annuities are regulated as a security, and overseen on a national level by FINRA and the SEC.

Today’s version of variable annuities can vary from a no-load/no-surrender charge version to offerings that have annual fees for the life of the policy as high as 3% to 4% (depending on the product and carrier). In addition, most variable annuities offer the option of attaching an income benefit rider to the policy at the time of application for future income needs. It also assures that the annuity company will hold on to your $$ while you receive those lifetime payments. They have the big buildings for a reason….right!

Variable annuities can work if you have someone managing the separate account (i.e. mutual fund) choices, or if you can do that yourself if so talented. The attached income riders can also provide future income guarantees, but fixed annuity income riders typically offer higher contractual payouts.

Full disclosure….I don’t sell variable annuities. I don’t offer any solutions to my clients that can go down with the markets, and I only focus on the highest contractual guarantees available for your specific situation. Under those strict parameters, variable annuities do not fit my “Will Do. Not might do.” mantra.

That doesn’t mean you shouldn’t own one or that they are bad. For pure tax-deferred market growth potential, variable annuities are the play. My recommendation is to find the best no-load/no-fee variable annuity with as many fund choices as possible…and manage the heck out of it.

And don’t forget to call me when you want to eventually transfer that risk to a fixed contractual guarantee. I’ll be waiting to hear from you.