Are Variable Indexed and Variable Annuities Really Safe?

Understanding Variable Indexed Annuities (VIAs)

A Variable Indexed Annuity (VIA)—also known as a Registered Index-Linked Annuity (RILA)—is a type of annuity contract that tracks the performance of a stock market index, like the S&P 500. However, it exposes the annuity owner to a limited amount of market loss in exchange for higher upside potential than a fixed indexed annuity. VIAs limit both gains and losses. They do this through either a buffer or floor:

• A buffer (e.g., 10%) absorbs the first portion of market loss. If the market drops 20%, the insurance company covers the first 10%, and you absorb the next 10%.
• A floor (e.g., -10%) means you absorb losses up to 10%—but never more, no matter how far the market falls.

Returns are capped by spreads, caps, or participation rates. Most VIAs also credit gains only once per term, usually annually, and your gains are not locked in until the term ends. Meanwhile, your account value can fluctuate monthly or daily.

What Is a Variable Annuity?

A Variable Annuity (VA) is a registered investment product where your money is invested directly in mutual fund subaccounts. The value of your account rises and falls with the market—you can lose all your principal if markets crash. You may choose to add income riders (for a fee), which create a secondary “benefit base” used to calculate lifetime income. This is separate from your actual account value and may grow even when your real account is losing money. This disconnect is one of the most misunderstood features in the industry.

• Mortality & Expense fees (M&E)
• Administrative fees
• Investment fund fees
• Rider fees (for income, death benefits, etc.)

Combined, total annual costs can exceed 3%–4%, which compounds over time and drastically reduces your performance, even if markets perform well.

Difference Between Variable Indexed Annuities and Fixed Indexed Annuities

Comparison: While safety is a major factor, there are structural differences in fees and upside potential. Read our full comparison of RILA vs variable annuity to see which strategy fits your portfolio best.

Why Consumers Feel Burned by Variable Indexed and Variable Annuities

• Complex Mechanics: Most consumers don’t fully understand buffers, crediting methods, or the difference between the benefit base and account value.
• Premiums “Disappear”: In a market downturn, monthly values drop. If you’re not in an active income phase, you might see your principal decline and wonder why the “guarantee” isn’t protecting you.
• High Fees: VAs in particular are expensive, and even VIAs sometimes layer in fees through riders and structured crediting options.
• Poor Estate Planning Value: Unless you have added riders, your annuity may offer minimal death benefits. Some pay nothing beyond what’s left in the account, which may be far less than you invested.
• Misleading Sales Pitches: These products are often sold using phrases like “downside protection,” “stock market participation,” or “guaranteed income,” but the sales rep may gloss over:
  • The limits on growth
  • The partial exposure to loss
  • The true costs of riders

Pros and Cons

Variable Indexed Annuity (VIA / RILA)

• Pros:
  • Partial downside protection (better than variable annuities)
  • More upside than fixed annuities (if markets do well)
  • Tax-deferred growth
• Cons:
  • Losses still possible (up to buffer/floor)
  • Complex crediting methods
  • No guaranteed lifetime income in most cases
  • Annual terms delay crediting
  • Cap rates can drop at renewal

Variable Annuity (VA)

• Pros:
  • Unlimited upside if markets perform
  • Optional lifetime income, death benefit, and long-term care riders
  • Flexible subaccount options for investing
• Cons:
  • No protection from loss unless you pay for expensive riders
  • High fees reduce net returns
  • Complex structures make them hard to understand
  • Surrender charges lock up your money for 7–10 years

Who Should Consider These Products?

Variable Indexed Annuities (VIAs)

• Investors who understand structured notes or equity derivatives
• People who want market exposure but need some downside limits
• Buyers who don’t need income immediately and can hold the product for 6+ years

Variable Annuities (VAs)

• High-net-worth investors using tax deferral strategically
• Individuals needing a lifetime income with equity exposure
• People are comfortable with high costs in exchange for customization

Who Should Avoid These Products?

• Retirees or near-retirees: These contracts expose your nest egg to risk at the worst time.
• Conservative investors: If you want stable growth and principal protection, these are the wrong tools.
• People relying on the money soon: Losses or market downturns can severely impact your short-term plans.
• Anyone looking for simple income: The income riders on VAs and VIAs are often more expensive and less reliable than fixed annuity GLWBs.

Better Alternatives

Fixed Indexed Annuities (FIAs)

• Zero market loss risk.
• Index-linked interest or fixed declared rate options (1-year fixed account).
• Commonly include GLWB riders with level or increasing income for life.

Multi-Year Guaranteed Annuities (MYGAs)

• Offer guaranteed interest for 3–10 years.
• Allow annual penalty-free withdrawals (usually 10% of the premium).
• Ideal for CD savers seeking higher fixed returns.

GLWB Annuities (With Fixed Indexed Base)

• Include Guaranteed Lifetime Withdrawal Benefit (GLWB) income riders.
• Three payout options:
  • Level payout
  • Increasing payout (based on CPI or flat percent)
  • Advanced payout (front-loaded for early retirement)
  • Payouts range from 5% to 10%+ based on age and structure.

SPIAs + Life Insurance

• A Single Premium Immediate Annuity (SPIA) for early income.
• Pair with life insurance to restore the death benefit value.
• Useful for early retirees avoiding 10% IRS penalties before age 59½.

Insurance That Complements These Strategies

• Life Insurance: Restores value lost through annuitization and protects beneficiaries.
• Long-Term Care Insurance: Shields your annuity assets from being depleted by care costs.
• Disability Insurance: Protects income if you plan to fund retirement with future annuity premiums.

What Accounts Can Fund These Annuities?

You can use the following to fund fixed, variable, and variable indexed annuities:

• Traditional IRA
• Roth IRA
• 401(k) / 403(b) rollovers
• After-tax savings (non-qualified money)
• SEP IRAs / SIMPLE IRAs
• Inherited IRAs (with distribution rules)

Final Thoughts

Variable annuities and variable indexed annuities are not inherently bad, but they are often misunderstood, overhyped, and oversold. They work best for a very specific type of investor. If you’re not that investor, they will likely disappoint you.

If you’re approaching retirement, need guaranteed lifetime income, or want true principal protection, you’re better off with a fixed indexed annuity or MYGA. These simpler contracts come with lower risk, easier-to-understand terms, and better estate value.

Contact The Annuity Expert today to compare annuity options that match your retirement goals. We’ll help you avoid high-fee products, maximize your income, and protect your principal—without falling for sales hype. Free quotes available now.

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