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What Are Variable Annuities?

Variable annuities, or VAs, are mutual fund investments that have certain insurance-related guarantees, such as living benefits and death benefits. (Mutual funds are bundles of stocks or bonds or a mixture of both. They make it easy for small investors to diversify their holdings and invest with less risk.)

The features of VAs include the following:

  • Minimum initial premium: You can purchase an individual VA contract for as little as $5,000 ($2,000 in an IRA, or in installments as low as $50 in an employer-sponsored retirement plan). For certain contracts, the minimum may be as high as $50,000. “Flexible premium” contracts allow regular or sporadic contributions.

  • Surrender period: The typical VA contract — one that is sold by a commission-earning broker or agent — has a surrender period during which you’ll be penalized if you withdraw more than an allotted amount.

  • Investment options: By definition, deferred VAs allow you to invest your premiums in subaccounts similar to mutual funds.

  • Death benefit options: All VAs offer death benefits. If you die before or without annuitizing your contract — that is, without converting it irrevocably to a guaranteed income stream — your beneficiaries will receive a certain minimum payout.

  • *Living benefit riders: These options, available for a fee, can protect you from investment risks. In most cases, the option must be elected at the time of purchase and paid for each year, whether exercised or not.

  • The option to annuitize: As with fixed deferred annuities, you have the option to convert the value of your VA investments to a guaranteed income stream in retirement that lasts for as long as you (or either you or your spouse) live, or for a specific number of years.