Take What You Risk, What It Costs, and What to Buy Instead
Variable annuities are securities, not insurance contracts. That means they expose your money to market loss, charge the highest fees of any annuity type, and often underperform safer alternatives. They’re frequently sold on the fear of missing out, not on what’s in your best interest. Below is a brutally honest breakdown of why many U.S. residents should avoid buying a variable annuity—and what to compare instead.
How Variable Annuities Work
A variable annuity is a tax-deferred investment vehicle issued by an insurance company and registered with the SEC. You choose from a menu of mutual fund-like subaccounts. The annuity’s value rises or falls based on the performance of those investments. Optional riders can add guaranteed income or death benefits—but at a steep cost.
Every Reason You Should Not Buy a Variable Annuity
- You Can Lose Money
Unlike fixed annuities or fixed index annuities (FIAs), variable annuities offer no principal protection. Your contract value fluctuates with the stock and bond markets. If the market crashes, your investment does too. This is unacceptable for anyone who needs a guaranteed income or preservation of principal. - They’re the Most Expensive Type of Annuity
Variable annuities include:- Mortality & expense fees
- Fund management fees
- Administrative fees
- Optional rider fees
These can easily add up to over 3% per year. Most FIAs, MYGAs, and traditional fixed annuities have no fees or much lower fees for income riders.
- They’re Tax-Deferred, But Taxed as Ordinary Income
Gains are taxed as ordinary income—no capital gains rates apply. If you pass the annuity to heirs, there’s no step-up in cost basis. Contrast that with brokerage accounts or life insurance, which offer more favorable tax treatment. - Income Riders Are Expensive and Misunderstood
To receive a lifetime income, you must purchase a guaranteed lifetime withdrawal benefit (GLWB) rider. This income is revocable and comes with a fee. The income is calculated off a phantom value, not your account value, which means it’s not money you can walk away with after the surrender period. Most buyers don’t understand this until it’s too late. - They Do Not Include Guaranteed Income by Default
If you don’t add a rider, you get no income guarantees. If you do add a rider, you may still receive less than what a fixed indexed annuity with a GLWB can offer. Many people mistakenly believe all annuities provide lifetime income. Variable annuities do not unless you pay extra. - You’re Locked In With Surrender Charges
Most variable annuities have surrender charges lasting 7 to 10 years. During that time, you’ll face penalties for withdrawing more than the free withdrawal amount (typically 10%). This limits flexibility and creates liquidity risk. - Market Losses Compound the Problem
When markets are down, your account value drops while fees still come out. Even when markets recover, you’re recovering from a lower base. With no downside protection, this creates significant volatility drag over time. - They Don’t Use Traditional Indexes
Variable annuities use actively managed mutual fund subaccounts, not the actual S&P 500, Nasdaq, or Dow Jones indices. There’s no participation rate, cap rate, or floor. Instead, your investment is entirely exposed. You may think you’re tracking the market, but you’re paying high fees to underperform it. - Poor Income Value Compared to Fixed Indexed Annuities
Even with a GLWB rider, variable annuities often pay lower lifetime income than comparable FIAs. FIAs offer lifetime income with no market risk, no principal loss, and better payout percentages from most carriers. - No State Guaranty Association Protections on the Investments
Only the insurance-related features (like GLWBs or death benefits) may be covered by your State Guaranty Association, not the investment portion. In contrast, fixed annuities and FIAs are considered insurance contracts and generally offer broader state-level protections (subject to your state’s limits). - They’re Not Liquid or Flexible
If you need access to your money before the surrender schedule ends, you could face:- Withdrawal penalties
- Market losses
- Tax penalties if under age 59½
- Reduction of guaranteed benefits
By comparison, many MYGAs and FIAs offer penalty-free withdrawals, RMD waivers, and nursing home waivers.
- You May Be Forced to Annuitize
Some older contracts or poorly structured riders require annuitization to access lifetime income. Once you annuitize, the decision is irreversible. You lose control of your money, and the remainder may not go to your beneficiaries. GLWB riders on FIAs give you a lifetime income without giving up control. - Not a Fit for Conservative Investors
Variable annuities are not insurance—they are securities. If you need guaranteed outcomes or are within 10 years of retirement, these contracts expose you to too much risk for too little reward.
Who Should Not Buy a Variable Annuity
- Retirees needing a guaranteed income with no market risk
- Conservative investors who prioritize capital preservation
- Anyone looking for low-cost, transparent investments
- Those who don’t understand subaccount performance or fees
- People who want flexibility and liquidity
Who Might Buy One (But Still Should Compare)
- High earners who’ve maxed out IRAs and 401(k)s and want additional tax deferral.
- People who want to take long-term market risk for potential growth
- Investors with long time horizons and no need for liquidity
- Someone who understands all fees, risks, and trade-offs—and still accepts them
Better Insurance Solutions to Compare First
Fixed Indexed Annuities (FIAs)
- Provide downside protection with upside potential
- Optional GLWBs offer guaranteed income without annuitization
- Include real indexes like the S&P 500, Nasdaq, and gold (if using a reputable carrier)
- Most offer a 1-year fixed account option with guaranteed interest
Who Needs It: Retirees or pre-retirees who want to grow savings with safety and generate income
Who Doesn’t: Aggressive investors who want pure market exposure and are willing to accept complete loss risk
MYGAs (Multi-Year Guaranteed Annuities)
- Offer CD-like fixed interest rates for a set term
- Tax-deferred growth with no market exposure
- Often allows 10% annual penalty-free withdrawals
Who Needs It: People with a 3–10 year time horizon who want higher guaranteed rates than CDs
Who Doesn’t: People who need income now or prefer market-linked growth
Life Insurance
- Provides a tax-free death benefit
- Can include cash value growth and living benefits
- Works well for estate planning, tax mitigation, and legacy planning
Who Needs It: Those with beneficiaries or estate tax exposure
Who Doesn’t: Those who only need income now and not legacy protection
Long-Term Care Annuities
- Multiply your premium for qualified long-term care needs
- Can preserve assets for your spouse or heirs
- Offers predictable benefits with no use-it-or-lose-it risk
Who Needs It: Seniors preparing for medical care or assisted living
Who Doesn’t: People already covered by robust LTC insurance or Medicaid
Annuities and Insurance Can Do What Variable Annuities Cannot
Variable annuities aim to offer growth, income, and protection, but fail to deliver on any of them. Instead of layering risk and fees, use the right combination of:
- Fixed indexed annuities for growth with protection
- GLWB income riders for lifetime income
- MYGAs for safe, fixed growth
- Life and LTC insurance for tax-advantaged planning
Compare and Buy the Right Annuity Today
Contact The Annuity Expert to compare fixed indexed annuities, income riders, and MYGAs before locking into a variable annuity. We’ll help you find the right solution based on your needs—not just what pays the highest commission. Request your free quote today.
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