Variable Annuities

Variable Annuities; Upside growth potential or heavy fees?
Variable annuities don't really help you have your cake and eat it too. By Keren Su / China Span / Getty Images

What is a Variable Annuity?

Variable annuities are the most popular and most sold product of all annuity types. They represent the majority of annuities issued for good reasons, but also have some down sides.

Variable annuities were introduced in the United States in 1955 by an organization that eventually became TIAA-CREF.  The intended use for the strategy was as a solution for tax deferred growth.

This is still the way variable annuities should be used in my opinion. For example, using funds from a non-IRA, or non qualified account, your taxes on any gains will be deferred until you take that money out of your variable annuity.

Variable Annuities are popular because of the potential market growth available.

A variable annuity is issued by a life insurance company, and provides investment choices. These investment choices come in the form of what the industry calls “separate accounts.”  These separate accounts are really just mutual funds offered by the carrier.  Funds are chosen by the annuity owner, and can be changed and reallocated based on the contractual rules of the chosen annuity.

Of all annuity types offered, variable annuities provide the most upside potential from a market growth standpoint.  In addition, income riders, or attached benefits, can be added to the policies to solve for specific things like a guaranteed death benefit growth, lifetime income, or confinement care type coverage.

  The riders come with annual fees for the life of the policy, with the fees deducted from accumulation (separate account/mutual fund) value, not from the specific rider value. 

Some variable annuities offer allocated fund choices that are categorized by risk.  For example, a variable annuity with this type of investment choice might offer low risk, moderate risk, or high risk mutual fund (separate account) portfolios.

What kinds of fees are attached to a Variable Annuity?

Variable annuities have the highest fees of any annuity type.  The average annual fee for a surrender charge variable annuity is 3 percent annually.  That fee is assessed for the life of the policy, and is deducted from the mutual fund (separate account) calculation.  That creates a big hurdle to climb if trying to achieve market growth.

Variable annuities can be purchased by a broker or advisor, and will have early surrender charge time periods that apply to the policy. Meaning if you withdraw the funds too early, you pay a fee. Conversely, you can also buy a no load variable annuity product direct from some carriers that does not involve using an agent or advisor. It provides full liquidity day one without any surrender charges.

In recent years, many annuity issuers have tried to buy back the living benefits (aka: riders) that were issued with policies. This brings into question whether a variable annuity rider guarantee is actually a guarantee.

It’s also important to know that when attached benefit riders are added to a variable annuity, most policies then limit your investment choices. This,along with the heavy ongoing fees if riders are attached, somewhat defeats the purpose of utilizing the strategy for growth.


No load variable annuities can provide market growth without the ongoing fees and lack of liquidity.

Variable annuities are too often sold as a one size fits all solution used to attain market growth, while gaining the benefits of attached riders.  The “have your cake and eat it too” sales pitch is unfortunately attractive to consumers looking to try to solve for everything in one product. In exchange for this supposed dream product scenario, consumers take on high annual fees for the life of the policy and limited investment choices with early surrender charges. These are the contractual realities of variable annuities.

Surrender charge variable annuities are one of the last places that traditional brokers and advisors can make a high commission. Given the guaranteed revenue, high fee variable annuities are often the vehicle of choice, even if a different product may provide the consumer a better fit.

If tax deferred growth is the goal, then a no load variable annuity could be an efficient solution and a unique addition to your market growth strategies.  No load variable annuities provide full liquidity day one, and the no fee structure is a positive from a growth standpoint when compared to the fee loaded variable annuity.