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    Annuities can help people in retirement or in their working life ensure they have enough money to live on. However, annuities are complex insurance products and have a variety of structures, benefits, and disadvantages. Learn about variable annuity pros and cons, their format, and other types of annuities to determine if they’re the right investment strategy for you.

    What Is a Variable Annuity?

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    Annuities are financial contracts between a person and their insurance company where the person invests money with the insurance company in exchange for guaranteed payments over a specific period of time. A variable rate annuity relies on stock market trends to increase the principal investment’s value. Variable annuities have higher earning potential than other types of annuities since the principal investment gains interest based on the stock market, which can experience high increases in value.

    Variable annuities go through two phases: the accumulation phase and the payout phase.

    Accumulation Phase

    Purchasing an annuity can be done through a single lump payment or a series of deposits. Usually, during the accumulation phase, no payouts occur. Instead, this is the time during which the value of the account grows based on stock market trends.

    Payout Phase

    In the variable annuity payout phase, accumulation, or growth, stops, and consistent payments from the account to the purchaser take place. The payouts continue for whatever period of time was originally specified in the contract — usually the purchaser’s lifetime or a set number of years.

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    How Are Annuities Structured?

    Annuities, including variable annuities, have two structures: immediate and deferred. These two structures impact how and when the purchaser receives their payment.


    Immediate annuities begin payout right away. There is no accumulation period after the purchaser invests their money. Variable annuities can be immediate, but the amount of money the purchaser receives each month varies depending on how the market performs. However, the initial investment won’t have time to grow much before payout begins, although the funds will gain interest over the time of the payout.


    Deferred annuities begin payout sometime after the initial investment. These annuities have a chance to grow and gain interest prior to payouts beginning. The longer the accumulation period, usually the more money the purchaser receives each month in the payout.

    Typically, deferred annuities are used for retirement income, so the payouts begin once the person has retired or has reached a specific age. Some annuities have penalties for beginning repayment prior to the purchaser turning 59 1/2 years old. For that reason, it’s rare for deferred retirement payments to start earlier than 60 years old for most purchasers.

    Pros for a Variable Annuity

    Variable annuities, whether immediate or deferred, offer purchasers several benefits:

    • Tax benefits: Just like some other retirement products, such as a traditional IRA, variable annuities grow with no tax implications until withdrawal begins.
    • Investment input: Purchasers have a choice of which funds they invest in. The insurance company usually offers choices, and purchasers can select the stocks that meet their needs.
    • Lifetime income: The set period of time the annuity pays out can be over the purchaser’s lifetime or even their spouse’s lifetime, ensuring consistent income. The purchaser can work with the insurance company to select the appropriate length of time in their contract.
    • Asset protection: Some states protect annuities from lawsuits or creditors. Putting money in an annuity could protect that income from use to repay debt.

    Cons for a Variable Annuity

    However, variable annuities do have some downsides, including:

    • Loss of money: The purchaser might lose some of their investment if they pass away prior to receiving the full amount of money they put into their annuity.
    • Stock market volatility: Since the stock market’s performance directly influences the amount of the principal investment, the purchaser could lose income if the stock market performs poorly.
    • Potential tax penalties: Many annuities have steep tax penalties if the money is withdrawn prior to the established payout date.
    • Fees: Annuities come with a host of fees for any deviation away from the original contract, including early withdrawal fees and annual fees for keeping the account open.
    • Limited fund options: While purchasers can choose which funds to put their money into, the stock options available might be limited by the insurance company.

    Other Types of Annuities

    Investors have a variety of annuities to choose from besides a variable annuity. Other annuities to consider are fixed annuities, equity-indexed annuities, and longevity annuities.

    Fixed Annuity

    A fixed annuity functions in much the same way as a variable annuity with one large difference. Rather than the payouts rising or falling with the stock market, the interest rate is set at the time of purchase, and the payouts are a consistent amount each month. Fixed annuities are often less risky than variable annuities since purchasers are ensured a specific payout each month.

    Equity-Indexed Annuity

    Equity-indexed annuities are a combination of both fixed and variable annuities. Part of the initial investment is placed in funds susceptible to stock market trends, just like a variable annuity, while the rest is given a set interest rate and functions as a fixed annuity. This product gives investors the safety of a fixed annuity with the potential for higher returns of a variable annuity.

    Longevity Annuity

    A longevity annuity is a super-deferred annuity that begins payout when the purchaser is around 80 years old or older. It ensures that the purchaser will have a consistent income for the rest of their life. Usually, longevity annuities are secondary retirement options and work with other retirement income to ensure that the purchaser won’t outlive their savings.

    When Should a Variable Annuity Be Used?

    Variable annuities are best for people who have already maxed out other retirement accounts like 401(k)s or IRAs. While variable annuities do provide a return on investment, that return is usually not as substantial as other retirement options and investments. Purchasers should select a variable annuity with low fees, minimal commission, and limited additional costs to maintain the value of the investment.

    Variable annuities can be a great retirement investment tool for people. Consider the benefits, disadvantages, and other types of annuities available before selecting an annuity product.

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