It’s no secret that today’s economy is tumultuous — so much so that some investors may be making unwise investment decisions that go against the best practices they’ve followed for decades. Variable annuities can be a great way for investors to venture back into the market as part of a diversified portfolio, as they can allow investors to take advantage of equity market returns when the market is performing well and work to reduce risk on the downside when market performance is poor. 

What’s a Variable Annuity?

A variable annuity is a long-term investment contract between an individual and an insurance company. Annuities offer many benefits, including tax-deferred treatment of earnings, various payout options, death benefits, and the option to add on other features through riders. The riders available on variable annuity products vary between companies; they include, but are not limited to, a Guaranteed Minimum Income Benefit, a Lifetime Withdrawal Guarantee, and Enhanced Death Benefit options.

Variable annuity riders can help you diversify your portfolio and protect against longevity, market, and inflation risks. 

What Kinds of Investments Are Available?

Variable annuities allow for investments in money markets, bonds, equities, and real estate; however, specific investment opportunities depend upon what your particular insurance company offers. How you choose to allocate between these options will depend on suitability information such as your age and your individual risk tolerance. As such, the value of the underlying investments will fluctuate with the market, and there’s no guarantee against a loss of your principal value. However, through the use of living benefit riders, you can manage this risk by guaranteeing that annuity payments will not be less than a specified amount, even if the account value cannot support the payments. These guarantees are issued by the insurance company and are subject to the claims-paying ability of the issuer. 

What Are the Drawbacks?

To begin, they can be expensive. Variable annuities charge base fees called mortality and expense charges of up to 0.5 to 2 percent. Riders create additional charges, depending upon what you select. In addition, while annuities come with certain protections from creditors, they contain company risk and exposure, so diversification between insurance companies may be recommended. They’re meant to be long-term vehicles, because the contract may impose a surrender charge if withdrawals are greater than the annual percentage specified by the contract, or if the annuity is surrendered prior to the end of the surrender period.

It’s also important to note that variable annuities aren’t intended to replace direct participation in the market but to supplement it. A rule of thumb is that variable annuities with income riders should not comprise more that 10-15 percent of your overall portfolio. Finally, the underlying guarantees differ among companies — and those guarantees can change very quickly — so make sure you understand exactly what you’re getting. Please note that guarantees are only as strong as the company that provides them. Therefore, before purchasing a variable annuity with guaranteed income riders, make sure you know the financial strength of the company you’re working with. 

Does a Variable Annuity Make Sense for You?

If you’re skittish about investing in today’s stock market, a variable annuity with income riders can be a great way to get back in while reducing downside risk.


Securities offered through Valmark Securities Inc., Member FINRA, SIPC, 130 Springside Dr, #300, Akron, OH 44333 330.579.1234. Plante Moran Insurance Agency and Plante Moran Financial Advisors are separate entities from Valmark Securities.