The Variable Annuity
In a variable annuity your premium is typically invested in specific sub accounts. Therefore, the value of your annuity fluctuates with the changing values of the sub accounts. Like all annuities, your gains are taxed deferred until you start withdrawals (see taxation). Where it gets tricky with variable annuities is understanding what exactly is guaranteed. I often hear people tell me about variable annuities guaranteeing 5 to 6% a year while being able to capture the upside of the stock market. This sounds too good to be true because it is. What the agent often fails to tell the client is the guarantee is not on the cash value of your annuity, it pertains to your future income benefit or benefit base. The benefit base is the value the insurer will use to derive your future monthly/yearly income if you annuitize the annuity. Annuitizing is like turning your annuity into a pension payment which will last for the rest of your life. If you decide to yank your money from the annuity after the market dramatically falls, you could be pulling out significantly less than what you put in leaving you wondering what happened with your guarantee. I realize all annuities are different. That is why I encourage you to contact me directly about any specific annuity in question.
In general, variable annuities tend to be my favorite of all annuities. With the proper selection, you can have your asset grow while being provided some minimal future benefit regardless of what happens in the stock market. Refer to value of Guarantee.