What are Variable Annuities

Variable annuities offer a number of different investment choices inside of the annuity, known as subaccounts. When establishing the variable annuity, owners can choose where they want their premiums to be invested each time. They can then change around the subaccount allocation whenever they want. The owner may also move money between the different subaccounts, both with no cost to the owner and with no tax consequences.

The different types of investment subaccounts, or separate accounts, are not part of the insurance company’s general assets. These subaccounts and their investment results stand on their own. The performance of the annuity contract as a whole depends upon the performance of the separate subaccounts, most of which are tied directly to the stock market. Therefore, the investment risk lies with the annuity owner, not the insurance company. Since the subaccounts aren’t part of the company’s general assets, should the company become insolvent, the variable annuity owners would not become general creditors of the company, as fixed annuity owners do.

The available subaccounts are generally managed by or for the insurance company. However, there are companies that offer variable annuities that have a number of nonproprietary funds from other mutual fund companies, such as Oppenheimer or Janus. The availability of these separate accounts typically varies between the different types of variable annuities offered, but annuity owners usually have a wide variety of choices.

The term “variable annuity” also applies when the annuity’s payout varies from period to period. Under the general terms of an annuity contract, the owner may stipulate to have the contract pay out a fixed amount of money per period, or he or she may choose to have a fixed amount of units (or annuity units) to be distributed each period. If the owner chooses to have a set amount of units as the payout, each payout will vary because the dollar amount is based upon the underlying subaccounts and their current prices per share. Thus, if the owner elects to receive 100 units per month, one month he or she may receive $550, while the next month he or she may receive $700. Generally, unless otherwise specified, when the payout comes out of the annuity, it will come proportionately from each of the subaccounts that have value.