Pros and Cons of Variable Annuities

Christian Worstell
In this article...
  • Discover the advantages and disadvantages of investing in a variable annuity. Learn how it compares to fixed annuities and who should consider investing in one.

A variable annuity is a powerful retirement savings tool that can provide financial security in your later years. It's essential to explore the pros and cons of variable annuities and other types of annuity options prior to settling on an investment decision.

Variable annuities offer unique advantages when compared to annuity products like fixed annuities, but also come with certain risks.

In this guide, we'll analyze the characteristics of variable annuities and compare them to other annuity products such as fixed annuities, discussing their advantages and disadvantages while considering who should consider investing in one.

Table of Contents:

What Is a Variable Annuity?

A variable annuity is an insurance contract that provides tax-deferred growth potential and income payments. It's a type of retirement savings vehicle that allows you to put your initial investment into a variety of different asset classes, such as typically mutual funds, stocks, bonds and ETFs.

The investment gains are not taxed until you begin withdrawing money from the account. This makes it attractive for those who want to grow their individual retirement accounts without having to pay taxes on the gains each year.

Variable annuities come with several benefits compared to other types of investments.

  • A benefit of variable annuities is the option to tailor withdrawals in accordance with your objectives. Index funds also provide protection against market downturns, since some insurance company guarantees include a minimum rate of return regardless of what happens in the markets.

    In addition, variable annuities can help reduce your tax burden by allowing you to defer paying taxes until a future date when your income may be lower than it was during accumulation years.

  • Despite these advantages, variable annuities come with their own set of risks – most notably high fees and surrender charges if you decide to cash out early or switch investments within the contract period.

    Additionally, inflation can erode the value of these investment vehicles due to increasing prices for goods and services. This means that although your initial investment may remain intact (or even increase), its purchasing power will decrease as more dollars are required for everyday items like groceries or gas compared with when it was initially invested into the policy years ago.

When deciding whether a variable annuity insurance contract is right for you, consider your risk tolerance level as well as your overall financial goals:

  • Are you looking primarily for appreciation on your money invested?
  • Are you seeking insurance guarantees for returns on your investment?
  • Do you need flexibility regarding how and when you can withdraw money?
  • Do you want to add a death benefit so your named beneficiary will start receiving payments when you pass away?

Answering these questions can help determine which type of product best suits your needs – fixed vs variable – and which features would benefit you most in terms of achieving those objectives while minimizing costs along the way.

Key Takeaway: A variable annuity provides tax-deferred growth potential and income payments. They offer flexible periodic payments or lump sum options and protection against market downturns. Investors should carefully evaluate their risk appetite and financial objectives when comparing investment options.

Benefits of a Variable Annuity

Variable annuities are well-known money market instruments for those seeking to augment their individual retirement accounts. A variable annuity offers the potential for higher returns than a fixed annuity, as well as greater flexibility in terms of the money invested.

With a variable annuity, you can customize your portfolio and investment sub-accounts to suit your individual needs and goals. Underlying investment options typically include stock market funds, index funds and other money market instruments.

A variable annuity can be advantageous, providing tax-sheltered growth on capital gains accrued within the account. This means that you won’t have to pay taxes on any profits until you begin taking withdrawals from the account, allowing you to potentially save more money over time by deferring taxes until later years when you may be in a lower tax bracket.

Another benefit of investing in a variable annuity is its death benefit feature. If an investor passes away before they’ve had the chance to withdraw all their funds from their account, many insurers will provide beneficiaries with either the remaining balance or an amount equal to what was originally invested (whichever is greater). This ensures that loved ones will receive some compensation should something happen unexpectedly during one's lifetime.

Investors in variable annuities have the advantage of accessing up to 10% of their funds each year without incurring surrender charges or other penalties. This makes it convenient for those who require quick access to cash, such as in cases of medical emergencies or home repairs. Additionally, this liquidity feature can be a boon for those seeking to maximize their retirement savings.

Investors in variable annuities can rest assured that, depending on the type of product and insurer they choose, certain types of investments within these accounts are safeguarded against losses. This offers a degree of security for those who have worked hard to build their retirement savings over the years; even if markets take a nosedive, their money will remain intact. 

A variable annuity can be a great tool for retirement planning, offering potential growth opportunities and tax-deferred savings. Yet, prior to determining any plans for one's financial future, it is critical to comprehend the potential risks connected with such an investment.

Key Takeaway: Variable annuities are a great way to maximize retirement savings, offering tax-deferred growth and death benefit features. Additionally, investors can access up to 10% of their funds each year without incurring surrender charges or other penalties, which can be a real life saver in cases of medical emergencies or home repairs.

Risks of a Variable Annuity

Variable annuities can be advantageous for numerous individuals, yet they also bring potential hazards. It’s important to understand the potential risks associated with variable annuities before investing in one.

The most significant risk associated with variable annuities is market risk.

The value of variable annuities can be influenced by changes in the stock and bond markets, with gains or losses potentially resulting from market performance. Conversely, if the market performs poorly over time, you may experience a decrease in your returns.

Variable annuities typically have high fees and expenses when you withdraw money, which can further reduce your returns if not managed properly.

Another potential risk of variable annuities is liquidity risk. Variable annuities usually have surrender charges and other restrictions on when you can withdraw funds from them without incurring penalties or taxes, so it may be difficult to access your money when you need it most unless you plan ahead carefully.

Additionally, certain annuity contracts may limit the amount of money that can be withdrawn annually and impose extra limitations on withdrawals, which could hinder one's capacity to get hold of their funds in a hurry during an urgent situation.

Given the associated risks, it is essential to be informed before investing in a variable annuity. Yet, certain investors who accept the risks involved may find a variable annuity to be an alluring investment.

Key Takeaway: Variable annuities come with inherent risks, such as market volatility and liquidity issues. Investors need to be conscious of the fees and limitations that come with variable annuities prior to making decisions regarding their finances.

Who Should Consider a Variable Annuity?

Variable annuities are a favored retirement saving choice for those seeking to grow their wealth in the long run and delay taxes on investments. Variable annuities offer a range of investment choices, enabling investors to diversify and craft an approach that suits their particular goals.

Variable annuities can be an attractive option for those who have maxed out contributions to tax-advantaged accounts, as they allow deferral of taxes until withdrawal and provide death benefit protection. Additionally, variable annuities offer death benefit protection which ensures that your named beneficiary receives at least the amount invested if you pass away before withdrawing any funds from the account.

Those who want more control over how they invest should consider a variable annuity since it offers access to multiple fund options with different risk levels. Investors can select from a range of assets such as stocks, bonds, money market accounts, mutual funds and more to match their risk appetite and desired returns. 

People who are looking for a retirement savings option that offers potential growth and protection of principal should consider a variable annuity. Weighing up the attributes, advantages and potential drawbacks of fixed-term and variable annuities is essential for determining which kind of product may be suitable.

Key Takeaway: Variable annuities offer investors the potential to invest in various funds, defer taxes on their investments and enjoy death protection. Investing wisely requires knowing your risk tolerance and financial goals while keeping an eye out for potential market volatility.

Comparing Fixed and Variable Annuities

Fixed annuities and variable annuities are both types of retirement income products that provide individuals with a steady stream of periodic payments after they retire. Fixed annuities provide guaranteed income payments, while variable annuities offer the potential for higher returns but also come with more risk.

  • A fixed annuity provides a consistent payment, either monthly or yearly, throughout the duration of the agreement.

    The return from your investment is determined by the prevailing interest rates when you acquire it, and this does not alter over time. This makes them ideal for retirees who want to ensure their income remains stable throughout retirement as they do not need to worry about market fluctuations affecting their investments.

  • Variable annuities involve investing in mutual funds or other securities that have fluctuating values based on market performance.

    Return on investment can be unpredictable with variable annuities, with possible higher rewards but also greater risks than a fixed product. Variable contracts typically include additional features such as living benefits riders which can help protect against loss due to market downturns or long-term care expenses if needed in later years of life.

Variable Annuity FAQs

Are Variable Annuities Ever a Good Idea?

Variable annuities may be advantageous for some, contingent on their fiscal objectives and risk tolerance. They offer the potential of tax-deferred growth with the ability to access funds without incurring taxes or penalties in certain circumstances.

However, they also come with high fees and complex terms that may not make them suitable for everyone. Before investing in variable annuities, consul with financial advisors.

What Is Good About Variable Annuities?

Variable annuities are a type of retirement savings product that offer the potential for growth and tax-deferred accumulation. They provide investors with the ability to select from an array of investment options, including stocks, bonds, mutual funds, ETFs and more.

Variable annuities also come with certain guarantees such as death benefit protection and income riders which can help protect against market volatility while providing some level of financial security in retirement. The guaranteed income can be useful for older adults who primarily rely on Social Security retirement income.

What Is the Downside of Variable Annuities?

Variable annuities can be expensive and come with high fees. The value of your investments could potentially decrease if markets don't do well, as variable annuities are exposed to market risk.

Additionally, variable annuities typically have long surrender periods which means you may not be able to access your money for a number of years. Some policies may also include additional riders or features that increase costs but do not necessarily add much benefit.

How Do You Explain a Variable Annuity?

A variable annuity is a type of insurance agreement that provides an opportunity to invest in various assets, including stocks and bonds, with tax-deferred growth until withdrawal. Your money grows tax-deferred until it’s withdrawn.

You can make withdrawals at any time subject to withdrawal charges, surrender fees and other terms stated in the variable annuity contract. Variable annuities are complex products and should be carefully evaluated before investing.


A variable annuity contract can be a great retirement investment option for those who are comfortable with taking on more risk. Before investing in a variable annuity, it is essential to understand the associated risks and rewards.

Comparing fixed and variable annuities can help you decide which type of product will best suit your financial objectives. With careful research, understanding and planning, a variable annuity could potentially help you achieve greater returns than other types of investments during retirement years.

Discover how variable annuities can help you age with financial security and good health.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at

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