Are Variable Annuities Good or Bad

How many times have you watched a movie that you thought was really bad, only to hear from other people how great it was. You might swear that they saw a completely different movie. In a way they did. Judgments about good and bad are purely subjective based on people’s frame of reference and their preferences. The same can be said about investments. Your financial profile is as unique as your fingerprint. An investment might match your profile, and, at the same time, be totally unsuitable for the person standing next to you. It would be good for you, but bad for the other person.

As an investment, variable annuities contain certain characteristics and features that may or may not match your profile. The only way you could determine if it were to be a good or bad investment for you is to assess your own needs, objectives, preferences, priorities, concerns and risk tolerance. Then, with and honest appraisal of the features and characteristics of a variable annuity you would be in a position to render a judgment.

Variable Annuities are Good if….

You understand and can accept market risk.

Variable annuities are accumulation vehicles that allow investors to choose from among different professionally managed investment accounts to create a diversified portfolio of stocks, bonds real estate and fixed yield investments. As such, the account values are subject to fluctuations as the various markets move through their up and down cycles. For investors who understand that they will have to tolerate these fluctuations in order to achieve good returns, variable annuities can be a good investment.

You are in a high combined federal and state tax bracket.

The ability to achieve higher returns combined with the tax deferred accumulation of the earnings, makes variable annuities an attractive investment alternative for people in higher tax brackets. Being able to defer taxes on gains on which you might have otherwise had to pay at a combined 50% tax rate, is as good as increasing your return by 50%.

You have a long term time horizon.

Variable annuities are designed as long term investment vehicles. The tax code treats them as such, and so, in order to benefit from the tax deferral, it requires that the funds be kept in the account until you have reached age 59 ½ or they will be subject to a 10% penalty.

Additionally, the issuing life insurers, can only provide the guarantees and benefits of the annuity if the funds are committed for the long term. While they do allow access to your funds through an annual withdrawal privilege, they will assess a fee of up to 12% for withdrawals that exceed 10% of your account value. This provision is generally not a concern for investors who have a long term investment outlook and who have access to other liquid investments.

You want to protect your financial legacy. Some people saved their money for a good part of their lives, only to have the 2008 market crash wipe out half. Since then, many have had the opportunity to rebuild their 401k and investment accounts, however, for those who met an untimely demise after the crash, their survivors and heirs bore the brunt of the financial suffering. One of the distinctive features of variable annuities is the guaranteed death benefit which gives your family the assurance that, no matter how poorly the market performs, they will receive no less than your original investment.

You are concerned with outliving your income in retirement.

Variable annuities are thought of as accumulation vehicle, they also include an income component like any other annuity. The most essential premise of annuities is their ability to generate a guaranteed stream of income that cannot be outlived. Once you have accumulated a pot of money inside your annuity, you can then have it converted into an income annuity.

You could choose to keep your account balance invested in variable accounts which could potentially generate a monthly income that grows as the markets grow. You would need to be mindful of the fact that the markets will fluctuate which will cause your income to fluctuate. But if you believe that the markets will continue to trend higher, as they always have, they you could benefit from increasing income over time. Alternatively, you could choose to fix your income payout based on a guaranteed rate of interest. A solution that is suitable for most people is to split your investment between a variable and a fixed income annuity.

Variable Annuities are bad if….

You are intolerant of market risk

You could instead choose to invest in a fixed or indexed annuity.

You are in a lower tax bracket.

You may be better off investing in mutual funds.

Your investment time horizon is short

Unless you can commit your funds to at least a 10 to 15 year timeframe, you should avoid variable annuities.

You have no concern for a financial legacy

Although the guaranteed death benefit is not the only reason to invest in variable annuities, it is a feature that you pay for through mortality charges.

You have yet to maximize your contributions to your qualified plans

You should first take full advantage of your qualified retirement plans for their additional tax advantages.

You don’t have sufficient liquid assets.

If a variable annuity is your only investment asset, it could turn out to be a bad investment if your circumstances change enough to force you to liquidate it in the short term.

You can’t derive all of their benefits.

While variable annuities have several unique and advantageous benefits, there don’t come without additional costs. Variable annuities include fees and charges that could reduce the impact of their benefits if you are not in a position to fully utilize them. It is possible to find variable annuities with reduced expenses and sales loads, but they still need to be weighed against the benefits you should expect to receive.


Are variable annuities good or bad? The answer lies in the eye of the beholder. Only after you truly understand your own situation can you honestly evaluate variable annuities as a suitable investment alternative for you. It’s also important to know that the universe of variable annuity products is vast, and that their features and expenses vary widely, so it would be difficult to form a judgment based on any one product.