Definition - What does Variable Annuity mean?
Variable annuity is an insurance contract where the insured gets to decide where the insurance payment is going to be invested from a list of investment options prepared by the insurer. While the contract ensures minimum payment for the insured, the future performance of the chosen securities determines the rest of the amount he or she is going to receive.
Insuranceopedia explains Variable Annuity
Variable annuity is considered one of the retirement plans by many because it offers death benefit and income after retirement.
The freedom to choose where insurance money is going to be invested in makes variable annuity appealing to some investors. If the investments are going to be profitable, the policy pays off for the insured.
Another advantage is that the money spent on the investments (such as stocks) is tax-deferred. The insured only gets taxed if he or she starts getting paid by the insurer. The insurer also has the option to change investment options while owning the policy.
The most obvious disadvantage is that if the chosen investments do not perform well, then the payments for the insured will also be affected. Tax deferrals also stop once the insured starts getting paid by the insurer. There are also taxes in capital gains from the chosen investments.
Another criticism hurled at a variable annuity is the number of charges and fees.
An example is the surrender charge where a percentage of a withdrawal from the account goes to the insurer. The insured will also get to pay the insurer for the upkeep of the policy. If the insured wants to have additional benefits, he or she is also going to be charged for those too.