Variable Annuities

A variable annuity is a hybrid insurance company product, combining a number of funds that resemble mutual funds with insurance protection that guarantees, at a minimum, that your beneficiary will get your principal back if you die before beginning to collect benefits.

Your 401(k) plan may offer variable annuities as well as mutual funds as investment choices. Or, if your plan provider is an insurance company, the plan itself may be a variable annuity.

With a variable annuity, you allocate your contributions among the subaccounts that the annuity offers. Each subaccount has an investment objective and makes investments to meet that objective. Your earnings depend on the investment performance of the subaccounts you choose and the formula the company uses to credit any gains or losses to your account balance.

Variable annuities have some advocates, who point to the insurance protection as a safeguard against losing money. But critics object to the cost of this insurance protection, which makes variable annuities more expensive to own than mutual funds making similar investments. Some even question the need for insurance in a long-term savings plan. The critics also point out that many variable annuities carry higher management fees than mutual funds do, further raising the expense and reducing your return.

Finally, while there’s general agreement that variable annuities are complex products, critics point out that they are often explained in complex language that tends to underplay the costs while it overplays the benefits.