A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.
Variable annuities can be confusing, and it may be difficult for an investor to understand all of their terms and conditions. Brokers, who earn high commissions for sales of variable annuities, tend to sell variable annuities by touting supposed benefits, including insurance features or “death benefits” and tax-deferment benefits. Many times, the promotion of these benefits is misleading and the benefits may not even apply to an investor’s given situation.
Investors should be particularly wary of any advice to invest in a variable annuity within an IRA account (mainly because the tax benefits may be redundant) or switching from one annuity to another (because the fees associated with such switches may outweigh any supposed benefit of the new annuity).