Variable annuities offer a variety of investment options, similar to mutual funds, that generate varying returns. Unlike fixed annuities, however, variable annuities offer few guarantees. In return for accepting more risk, the owner of a variable annuity may receive higher potential returns.
During the accumulation phase of a deferred variable annuity, the annuitant decides how the annuity premiums are invested. The annuitant can select from a variety of sub-accounts such as equity, bond, growth, growth and income, small cap, international, social awareness, and money market portfolios, allocating the annuity premiums to one or more of these sub-accounts. The value of the annuity will then fluctuate based on the investment results of the sub-accounts selected by the annuitant.
Because variable annuities offer the purchaser the ability to invest in various sub-account choices that may include stocks and bonds, these products are considered securities and must be accompanied by a prospectus, which is registered with the Securities and Exchange Commission (SEC). In order to offer variable annuities to a client, an agent must be a Registered Representative with the National Association of Securities Dealers (NASD) and possess at least NASD series 6 and 63 licenses in addition to an insurance license.
When distribution from a variable annuity begins, the value of the annuity in each applicable sub-account is used to purchase annuity units. The number of annuity units then remains fixed, but their value may fluctuate based on the actual performance of the applicable sub-accounts, resulting in a higher or lower value being paid to the annuitant each month. While the income payments may fluctuate, they are guaranteed for life.
With their greater potential for asset growth tied to market performance, variable annuities are best suited for long-term investors who are not risk-averse. However, variable annuities are only as financially stable as the issuer selling them. Buyers should check issuers' credit ratings, selecting those with single-A ratings or higher.
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