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.