Variable annuities have become a part of the retirement and investment plans of many Americans. Before you buy a variable annuity, you should know some of the basics—and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right.

What is a Variable Annuity?

variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
 
A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

FIRST, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

SECOND, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount—typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.

THIRD, variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.

Download Variable Annuities: What You Should Know. . .

PDF format, 20MB, 24Pages.
By United States Securities and Exchange Commision.

You’ll find on the SEC’s website—at www.sec.gov avast array of educational materials that explain how the securities industry works and provide tips on avoiding costly mistakes and fraud.  Some of these publications are also available in print form.  To have a print brochure mailed to you, call our toll-free publications line at 1-800-SEC-0330. 

• Ask Questions — Questions you should ask about all of your investments, the people who sell them to you, and what to do if you run into problems.  
  Available in print form.
• Check Out Brokers and Advisers — Tells you how to get background information about your broker or investment adviser, including prior employment history and disciplinary actions.
• Complaints? What to Do — Describes how to handle a problem with your broker or investment adviser.  Available in print form.
• Invest Wisely: An Introduction to Mutual Funds — Basic information about investing in mutual funds. Much of this information applies to variable annuities, as well. Available in print form.
• Mutual Fund Investing:  Look at More Than a Fund’s Past Performance — Describes some of the factors you should consider in choosing a mutual fund.
• Mutual Fund Cost Calculator — An interactive tool that allows you to compare the total costs of owning different mutual funds.

You’ll also find helpful information on these websites:

• Financial Industry Regulatory Authority (FINRA) — FINRA is an independent self-regulatory organization charged with regulating the securities industry, including sellers of variable annuities. FINRA has issued several investor alerts on the topic of variable annuities, which you can find online at www.finra.org. FINRA also periodically issues “Notices to Members,” reminding them of their responsibilities to investors in selling various products, including variable annuities. If you have a complaint or problem about sales practices involving variable annuities, you should contact the District Office of FINRA nearest you. A list of FINRA District Offices is available in the “Contact Us” section of FINRA’s web site at www.finra.org.
• National Association of Insurance Commissioners (NAIC) — The NAIC is the national organization of state insurance commissioners. Variable annuities are regulated by state insurance commissions, as well as by the SEC. The NAIC’s web site at www.naic.org contains an interactive map of the United States with links to the home pages of each state insurance commissioner.  You may contact your state insurance commissioner with questions or complaints about variable annuities.

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