Variable Annuities – Insurance Products or Investments?
Actually, they’re both. Variable annuities are long-term investment products with insurance features. Variable annuities differ from traditional insurance products in important ways. First and foremost, variable annuities are securities registered with the Securities and Exchange Commission and the sale of variable annuities is regulated by the Financial Industry Regulatory Authority (FINRA).
An annuity is a contract in which an insurance company agrees to make periodic payments to an annuitant for the rest of their life starting immediately (immediate annuity) or at a later date (deferred annuity). In addition, most variable annuities offer a death benefit that is payable to a named beneficiary if the annuitant dies before the insurance company starts making the periodic payments.
With a variable annuity, the owner selects the specific investments the annuity will hold, typically mutual funds, but stocks and bonds are other possible options. Because the annuity contains securities which may go up or down in value, the value of the annuity itself will change over time. It is possible to lose money in a variable annuity.
Variable annuities are sometimes compared to mutual funds, but they differ in several ways. Variable annuities offer tax-deferred treatment of earnings, a death benefit, and payout options that can provide an income stream for life. Variable annuities, however, generally have much higher expenses than a typical mutual fund, have substantial charges for early withdrawal (usually if you surrender the annuity within 6-8 years from purchase of the annuity), and charges for other features or “riders” such as an enhanced death benefit.
Variable annuities may be appropriate for investors with long-range goals. The large variety of different features and riders offered for any particular annuity can be confusing. It can be difficult to understand exactly what you are buying.
Before you turn over your hard earned money, you should:
- Check out your broker on FINRA’s Broker Check database.
- Discuss your investment objectives, risk tolerance, and how the variable annuity would fit into your overall investment portfolio with your broker.
- Review the prospectus and ask questions about anything you don’t understand.
- Make sure you understand all of the charges such as, surrender charges, costs of riders and enhanced benefits, and investment option expenses. These charges will reduce the value of your annuity because they are paid from the amount you invest.
- Ask about your broker’s compensation for the investment. Brokers may receive a higher commission for selling variable annuities than other products so they may be incentivized to recommend something that may not be appropriate for your particular financial goals.
- Review the SEC’s Investor Bulletin on Variable Annuities.