Compare Variable Annuities Before You Buy

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A variable annuity blends market-linked investing with insurance protections, allowing you to invest your premium in subaccounts (similar to mutual funds) for maximum growth potential while offering optional guarantees like lifetime income riders and enhanced death benefits. Because you are exposed to market risk, and since annual fees, subaccount performance, and income rider costs vary significantly across insurance companies, comparing your options side by side is essential to ensuring the potential rewards outweigh the expenses. Fill out the short form below to request your free, customized comparison quotes, or call us directly at 770-755-1565 to speak with an independent licensed broker right now.

While comparing variable annuities, annuities for growth-oriented investors can help separate higher upside potential from the market risk, fees, crediting limits, and guarantee tradeoffs used to get it.

What Is A Variable Annuity?

A variable annuity is a contract with an insurance company that blends investing with insurance. You put money into the contract, the insurer invests it in subaccounts (similar to mutual funds), and your account value will rise or fall depending on market performance.

Unlike fixed annuities that guarantee steady growth, variable annuities give you the potential for higher returns—but they also expose you to market losses. In return for higher risk, you get optional protections such as:

• Tax-deferred growth (like an IRA, but no contribution limits)
• Lifetime income riders that guarantee income you can’t outlive
• Death benefits to protect heirs if you pass away early

But these benefits come at a cost: variable annuities have the highest fees of any annuity type and can be complex. Understanding how they work is essential before deciding if they’re right for you.

Skip the complex market research—we’ll find the best variable annuities for you for free.

How Do Variable Annuities Work?

When you invest in a variable annuity, your money is allocated to various investment options, often similar to mutual funds. These funds can fluctuate in value based on market performance. During the accumulation phase, your investment grows tax-deferred. When you decide to annuitize, you receive periodic payments based on the value of your investments and any guarantees the annuity provides.

1. Accumulation Phase: Investing for Growth

During this phase, you make either a lump-sum payment (single premium) or multiple contributions (flexible premiums). Your funds are invested in subaccounts—similar to mutual funds—which may include stocks, bonds, or money market funds.

• Your account value rises or falls based on market performance.
• All earnings grow tax-deferred until withdrawn.
• You can typically rebalance or transfer funds between subaccounts, typically with a limited number of transfers allowed per year.

You may also add optional riders (at a cost) during this phase:

• Guaranteed Lifetime Withdrawal Benefit (GLWB)
• Enhanced Death Benefit
• Long-Term Care (LTC) coverage

These benefits provide future income guarantees or legacy protections regardless of market performance—but do not increase your actual account value.

2. Payout Phase: Taking Income

Eventually, you’ll want income from your annuity. You have three main options:

• Systematic Withdrawals – Flexible withdrawals you control. You can start or stop them, but the balance may run out.
• Annuitization – Converts your account into guaranteed lifetime payments. This is permanent: you lose control of the money, and inheritance options are limited.
• Guaranteed Lifetime Withdrawal Benefit (GLWB) Rider – The most popular modern choice. It provides contractually guaranteed income for life while allowing you to keep control of your account. Even if your account value goes to zero, the income continues, and your heirs inherit any remaining balance.

Expert Advice: When you transition from the growth phase to receiving guaranteed income, your variable contract undergoes a technical conversion. Your accumulation units are exchanged for annuity units, which then dictate the fluctuating value of your monthly payments based on subaccount performance. You should compare variable annuity payouts across multiple carriers, as rates can vary by 20% or more between companies.

👉 Key Point: Annuitization is optional. Most people today prefer the GLWB rider because it offers lifetime income without giving up flexibility or legacy planning.

We do not recommend annuitization unless it’s required—opt instead for a GLWB rider when possible.

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How Insurers Track Your Money

When you own a variable annuity, the company uses two different types of “units” to keep track of your money:

• Accumulation Units – Used while you’re saving. They measure how much you’ve invested and how it grows or declines in value with the market.
• Annuity Units – Used once you start receiving income. Your accumulation units convert into annuity units, which determine the size of your payments. The number of units is fixed, but their value can change, so your income may rise or fall with the market.

Funding Methods: What Accounts Can Pay For The Annuity

• Non-qualified cash.
• Traditional IRA rollover.
• Roth IRA rollover (creates tax-free lifetime income).
• 401(k), 403(b), 457(b), and TSP rollovers to an IRA annuity.
• SEP and SIMPLE IRA rollovers.
• Pension lump sums rolled into an IRA annuity.
• 1035 exchanges from another annuity.
• Inherited IRAs: follow special distribution rules.

Expert Tip: Stuck in a bad variable annuity? Here’s how you can roll that into an IRA or another variable annuity.

Key Variables That Affect Performance and Payouts

Variable	Description
Subaccount Performance	Determines the growth (or loss) of your account value
Fees	Deductions for insurance, admin, and fund management
Rider Elections	Optional features that may affect cost and available benefits
Timing of Withdrawals	Impacts how long your money lasts and how riders function
Annuitization Rates	Based on age, gender, and payout option selected

What’s Behind the Scenes: How the Carrier Makes Money

• Fees: Charged on your account value regardless of performance
• Surrender Charges: If you withdraw too early
• Spread on Subaccounts: The carrier may earn from the underlying fund expenses.
• Rider Charges: Fees for GLWB or enhanced benefits, deducted annually

That’s why understanding how variable annuities work is critical—these products can serve their purpose, but only when you’re aware of what you’re paying for and what you’re giving up.

Costs: Why Variable Annuities Are Expensive

Most variable annuities incur fees ranging from 2% to 4% per year, which makes them more expensive than other retirement tools. Common charges include:

• Mortality & Expense (M&E) Fees: 0.5%–1.5%
• Administrative Fees: $25–$50 or 0.10%+ annually
• Subaccount Fees: 0.5%–2%+ depending on the funds chosen
• Rider Fees: 0.25%–1.25%+ per rider
• Surrender Charges: Penalties for early withdrawals, lasting 6–10 years

👉 High fees are the biggest drawback. Over decades, they can cut your long-term returns nearly in half.

Our Expert Advice: Over time, the 2% to 4% annual fees in a variable annuity can significantly erode your retirement savings. If you are looking for a way to grow your money without the high costs or market risk, you can compare current fixed annuity rates to find “no-fee” alternatives that provide guaranteed growth.

Liquidity in a Variable Annuity

• Free Withdrawals: Typically up to 10% per year
• Surrender Charges: Apply during the first 6–8 years, starting around 7–10%
• IRS Penalty: 10% penalty if under age 59½ and withdrawing earnings
• GLWB Income: Revocable—unlike annuitization, you retain account access
• Annuitization: Locks up principal permanently; you can’t take lump sums afterward

Helpful Tip: If you want to invest in the market but hate the high fees of traditional contracts, you might be a candidate for a “no-load” version. Read our comparison of no-load variable annuity products to see if giving up the agent’s advice is worth the cost savings.

What Happens Once Fees and Penalties Expire

The surrender period is a lock-in phase during which early withdrawals exceeding 10% trigger penalties. Once it ends, you have four choices:

1. Keep the Contract – Continue tax deferral and collect income if you have a GLWB.
2. Start Income – Turn on withdrawals or annuitize (not recommended).
3. 1035 Exchange – Switch into a lower-cost annuity without triggering taxes.
4. Cash Out – Move funds into an IRA or taxable brokerage account (taxes may apply).

Variable Annuity Taxation

Variable annuities are subject to specific tax rules:

• Non-Qualified Annuities: Only the earnings are taxed when withdrawn for non-qualified annuities (those purchased with after-tax dollars). The IRS uses the LIFO (Last-In, First-Out) method. That means earnings are taxed as ordinary income first, and then your original contributions are withdrawn tax-free.
• Qualified Annuities: If funded with qualified money (IRA, 401(k), rollover), 100% of every withdrawal is taxed as ordinary income, since you never paid tax on the contributions.
• Withdrawals: Withdrawals before the age of 59½ may incur a 10% early withdrawal penalty in addition to regular income tax.

What About RMDs?

Required Minimum Distributions (RMDs)

• If your VA is held within a qualified account, such as an IRA, you must take RMDs once you reach the required age (currently 73, increasing to 75 for younger generations under SECURE Act 2.0).
• RMDs apply whether you want income or not. If your VA is non-qualified, there are no RMDs.

What Happens at Death

• Not Annuitized: Beneficiaries inherit the account value or rider benefit.
• Annuitized: Payments depend on the option chosen (life-only ends at death, period-certain continues to heirs).
• Death Benefit Riders: May lock in the highest anniversary values or guarantee a return of premiums.

👉 Important: Beneficiaries still owe income taxes on earnings. For non-qualified contracts, only gains are taxable. For qualified contracts (IRAs, 401ks), the entire amount is taxable.

Riders and Waivers Explained

Riders are optional add-ons you can buy inside a variable annuity. They offer additional features such as guaranteed income, enhanced death benefits, or health-related coverage. Riders almost always add extra annual fees (often 0.75%–1.5% each), so it’s essential to understand what they do before paying for them.

Types of Riders

• GLWB Rider: Guarantees lifetime income without giving up access to your account.
• GMAB (Guaranteed Minimum Accumulation Benefit): Guarantees that after a set period (commonly 10 years), your account value will be no less than your original premium (or a set percentage of it), regardless of market performance.
• GMWB (Guaranteed Minimum Withdrawal Benefit): Guarantees that you can withdraw a fixed percentage of your original premium (often 5–7%) annually until you’ve at least recouped your total purchase payments — even if your account balance drops to zero.
• Enhanced Death Benefit: Provides your heirs with more than just the account value if you die during market downturns.
• Long-Term Care / Chronic Illness Rider: Allows you to access more income if you can’t perform certain activities of daily living (ADLs) such as bathing, dressing, or eating.
• Inflation Riders: Increase income each year either by a fixed percentage or tied to the Consumer Price Index (CPI).

Expert Note: Riders can provide powerful income guarantees, but they always come at an extra cost. Use our annuity calculator to model how these rider fees and market fluctuations might impact your total retirement income over the next 10 to 20 years.

Waivers: When Fees and Penalties May Be Forgiven

Most variable annuities have surrender charges, but insurers may waive these charges in special cases:

• Terminal Illness Waiver: If you are diagnosed with a terminal illness, you may withdraw funds without surrender penalties.
• Nursing Home Waiver: If you are confined to a nursing home for a set period (often 90+ days), surrender charges may be waived.
• ADL Waiver: If you lose the ability to perform activities of daily living, some contracts waive charges.
• Unemployment Waiver: Rare, but some contracts allow penalty-free withdrawals if you lose your job.

Important Note: Waivers typically apply only after your contract has been in force for at least 1 year, and each insurer defines eligibility differently.

Pros And Cons Of Variable Annuities

Pros

• Tax-deferred growth
• Higher potential returns than fixed annuities
• Lifetime income guarantees (GLWB)
• Legacy protection through death benefits
• Optional customization for LTC or inflation

Cons

• Highest fees of all annuities (2%–4% yearly)
• Market risk (losses possible, no floor)
• Contracts are complex with lots of fine print
• Liquidity restrictions (surrender penalties 6–10 years)
• Withdrawals taxed as ordinary income, not capital gains

Related Tip: For a more detailed look, check out The Pros and Cons of a Variable Annuity

Why Variable Annuities Are Often Mis-Sold

Variable annuities are among the most heavily marketed annuities, but they’re also the most misunderstood. Many sales pitches highlight the upside while minimizing the downsides:

• Bonus Offers: Some contracts offer upfront “bonuses,” but these usually come with higher fees, long surrender charges, or reduced growth potential elsewhere in the contract.
• Performance Projections: Agents often present optimistic growth examples that don’t account for fees or market downturns. In reality, returns after expenses are usually much lower than advertised.
• Complex Riders: Lifetime income riders sound attractive, but can cost 1–2% per year and are often tied to “benefit bases” that don’t represent real cash value.
• Pressure Sales: Variable annuities are sometimes pitched to seniors who don’t fully understand the risks. They may not need market exposure at all, but are convinced by guarantees that come at a high cost.

The bottom line: these products are not inherently “bad,” but they are often sold to the wrong people for the wrong reasons. Buyers must carefully weigh the fees, risks, and actual guarantees against safer annuity alternatives.

Helpful Tip: Unlike fixed contracts, where the insurer guarantees your principal, you shoulder the investment risk in variable annuities. Make sure you understand the difference between “market risk” and “carrier solvency risk” before you buy.

Comparison of Fixed, Fixed Index, and Variable Annuities

Feature	Fixed Annuity	Fixed Index Annuity (FIA)	Variable Annuity
Risk Level	Low – insurer assumes risk	Moderate – tied to index performance with principal protection	High – investor assumes full market risk
Growth Potential	Guaranteed fixed rate	Linked to market index with caps and spreads; no losses from market	Varies based on subaccount performance (can lose value)
Principal Protection	Yes	Yes	No
Market Participation	None	Partial (via index crediting)	Full (via subaccounts)
Income Options	Lump sum, annuitization, or income riders	Lump sum, annuitization, or income riders	Lump sum, annuitization, or GLWB rider
Guaranteed Lifetime Income	Available via annuitization or GLWB	Available via GLWB or annuitization	Available via GLWB or annuitization
Tax Treatment	Tax-deferred growth; ordinary income on earnings	Same as fixed annuity	Same as fixed annuity
Fees	Typically low or none	Low (may include rider fees)	High (2%–4% annually including M&E, subaccounts, riders)
Liquidity	10% free annual withdrawals; surrender charges apply	Same	Same; but higher penalties often tied to more complex contracts
Death Benefit	Return of premium or account value	Return of premium or account value	Standard or enhanced death benefit (rider may apply)
Best For	Conservative investors wanting guaranteed returns	Moderate investors wanting market-linked growth with safety	Growth-oriented investors who can tolerate risk and complexity
Who Bears the Investment Risk?	Insurance company	Insurance company (market determines crediting, but no losses)	You, the investor
Optional Riders	GLWB, LTC, death benefit	GLWB, LTC, death benefit	GLWB, enhanced death benefit, LTC

Variable Annuity vs. Mutual Funds

Many investors compare variable annuities to mutual funds because both invest in the market. However, the differences are critical:

Feature	Variable Annuity	Mutual Fund
Tax Treatment	Tax-deferred, but withdrawals taxed as ordinary income	Taxable annually (capital gains/dividends); lower long-term capital gains rates
Fees	High (M&E charges, admin fees, rider fees)	Lower (expense ratios, often under 1%)
Liquidity	Limited; surrender charges apply for 6–10 years	Fully liquid; can sell at any time
Income Guarantees	Can add GLWB or annuitize for lifetime income	No guarantees; investment risk only
Death Benefits	Standard return of account value, optional enhancements	No guarantees beyond account balance
Best For	High-risk investors who need insurance benefits	Investors seeking low-cost, flexible growth

Key Takeaway: A mutual fund is almost always a more cost-effective and efficient option for market investing. A variable annuity only makes sense if you specifically want tax deferral and optional income or death benefit guarantees — but you’ll pay for them.

Who Should Buy vs. Who Should Avoid Variable Annuities

Who Should Consider Buying a Variable Annuity

• High-Net-Worth Investors Seeking Extra Tax Deferral: If you’ve maxed out 401(k)s and IRAs and want another tax-deferred account.
• Aggressive Investors with Insurance Needs: If you want market exposure but also value optional death benefits or lifetime income riders.
• Younger Professionals with High Risk Tolerance: Those who can ride out volatility and may benefit from long-term market exposure with tax deferral.
• People Seeking Market-Based Income Riders: A GLWB on a variable annuity can provide lifetime withdrawals, albeit with higher costs.

Who Should Avoid a Variable Annuity

• Conservative Savers: If you value safety over growth, a fixed or indexed annuity is a better fit.
• Fee-Sensitive Investors: If you’re concerned about 2–4% annual fees eating away at returns, look elsewhere (like mutual funds or indexed annuities).
• Retirees Needing a Predictable Income: Variable annuity payments fluctuate and may decrease over time. A fixed annuity or FIA with a GLWB provides steadier income.
• Short-Term Investors: If you need access to funds within 5–10 years, surrender charges and volatility make variable annuities an unsuitable option.
• Tax-Savvy Investors: Since withdrawals are taxed as ordinary income, mutual funds or ETFs with capital gains treatment are usually more efficient.

Key Point: Variable annuities are niche tools, not mainstream solutions for retirement. They are suitable for a small group of higher-risk investors, while most retirees are better served with fixed or indexed annuities.

Tips to Save Money on Variable Annuities

1. Shop Multiple Carriers
   • Never buy the first contract offered. Different insurers charge different fees and offer different rider benefits. Comparing side by side can save thousands over time.
2. Avoid Overpaying for Riders
   • Many riders duplicate protections you may already have elsewhere. Only pay for lifetime income, LTC, or death benefit riders if you truly need them.
3. Consider No-Load or Low-Cost Contracts
   • Some variable annuities marketed through fee-only advisors have lower costs than those sold by commission-based brokers.
4. Compare With Indexed or Fixed Annuities
   • If your primary goal is safety and a steady income, lower-cost alternatives often provide better long-term results.
5. Work With an Independent Agent
   • Independent brokers represent multiple companies, not just one. This ensures you see the best rates and benefits rather than being pushed into a single carrier’s product.
6. Ask About Exchange Options
   • If you already own a high-fee variable annuity, a 1035 exchange may allow you to move into a more efficient product without tax penalties.
   • Pro Tip: If you already own a high-fee variable annuity, you may be able to move your funds into a more efficient product without triggering taxes. An independent annuity broker can perform a free contract review to see if a 1035 exchange into a lower-cost fixed or indexed annuity is the right financial move for you.

Other Insurance Products to Consider

1. Permanent Life Insurance – Offers guaranteed death benefits and tax-deferred growth. Can complement a variable annuity by replacing wealth if annuity values drop.
2. Fixed Indexed Annuities – Provide market-linked growth with downside protection and lifetime income options.
3. Long-Term Care Insurance or Hybrid Annuities – Protect against healthcare costs not covered by Medicare.
4. Fixed Annuities – Better suited for conservative investors who need a predictable income.

Decision Path: Which Annuity or Product Fits You Best?

If You Want…	Best Fit	Why
Safety and predictable returns	Fixed Annuity (or MYGA)	Guarantees principal and a set interest rate for the full term
Market growth with downside protection	Fixed Indexed Annuity (FIA)	Links growth to an index but locks in gains and protects principal
Aggressive growth with tax deferral	Variable Annuity	Offers the highest potential upside, but at a high cost and risk
Guaranteed lifetime income with flexibility	FIA or Variable Annuity with GLWB Rider	Provides income without requiring full annuitization, and preserves control for heirs
Efficient legacy planning	Life Insurance	Creates tax-free wealth transfer, often better than annuitization death benefits
Income protection if disabled or needing care	Disability Insurance or LTC Insurance	Covers risks annuities aren’t designed for

How to Use This Path:

• Start with your primary goal: Safety, Growth, Income, or Protection.
• Match it with the product that delivers the result at the lowest cost and risk.
• Consider a variable annuity only if you’ve exhausted safer, lower-cost options and still want market exposure with insurance features.

Retirement Strategy: Variable annuities are niche products that aren’t the right fit for everyone. Before you commit to market volatility, view current annuity rates across all categories—including fixed indexed options—to see which products currently offer the best balance of growth and principal protection.

Get the Best Annuity for Your Retirement

Variable annuities are not one-size-fits-all. They appeal to investors who want market exposure plus insurance protections, but they come with steep fees and risk. For most retirees, safer alternatives like fixed indexed annuities or MYGAs provide better long-term results at a lower cost.

👉 Don’t buy direct from an insurance carrier—you’ll likely overpay and limit your options. Always compare multiple carriers before committing.

Contact The Annuity Expert for free quotes and independent comparisons to make sure you get the best annuity for your retirement goals at the lowest possible cost.

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