Variable Annuity Examples

(Who, what, when, and why)

Reviewer: Jeffrey Green Written by Jeffrey Green
Reviewer: Jeffrey Green
Written by Jeffrey Green

Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career.  He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.

Variable Annuity Example

Running out of money in retirement is a big concern when it comes to retirement planning according to the American Institute of CPA's Personal Financial Planning Trends Survey. 

Variable annuities are a popular planning tool because they are designed to build wealth and create lifetime income. Thinking about a variable annuity? Here are three common retirement planning scenarios where a variable annuity works well. 

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Scenario 1: A Single Mother Planning Her Retirement Protection

Linda is 53 and wants to retire at 62. She is single, her kids are grown, and college is paid for. She's concerned about how much income she'll need to retire. Linda is contributing the max to her employer-sponsored retirement plan and has accumulated $650,000 in savings and investments.

Linda’s goal is accumulating enough money to retire and maintain her lifestyle. Taxes take a bite from her savings, and Linda, like most people, saw her accounts go down in 2008 and 2009. 

But now that she's closer to retirement, she wants to protect her money, but is not satisfied with the rates of CDs and savings accounts — she wants to see growth in her savings.

A variable annuity can help someone like Linda grow her savings while minimizing taxes. Variable annuities have a selection of investments called subaccount funds which are similar to mutual funds. Investors can choose from stocks, bonds, and other asset classes. 

Unlike mutual funds, capital gains, and dividends from the subaccounts are not taxable income. If Linda wants to make changes in her portfolio, there's no tax on transfers between subaccounts. Tax deferral helps Linda because instead of Uncle Sam getting the money, it stays right in her account and continues to grow.

Linda may also consider a variable indexed annuity. Variable indexed annuities offer a level of protection against market losses selected by the investor. 

10% and 20% downside protections are common. In exchange for protecting the account against market losses, the growth in the account is limited or capped by the insurance company. Linda can build growth in her account and still protect her money.

Scenario 2: A Recently Retired Couple Concerned with Outliving Their Money

Bob and Alice are 65 and 63 and have recently retired from successful business careers. They have retirement and other accounts, have invested well, and have a comfortable lifestyle. Bob and Carol’s parents all lived well into their 90’s, so they're concerned about outliving their money.

A variable annuity can help Bob and Alice with a living benefit called Guaranteed Lifetime Withdrawals. Living benefits are a feature of variable annuities that can guarantee a minimum amount of lifetime income regardless of how the market performs. 

The main feature of  living benefits is that you get the higher of the minimum income and the income from your account. A benefit base is how the insurance company figures out how much income you should receive. 

The initial benefits base is the purchase payment. The benefit base increases by the higher of the actual account value, or a percentage increase of the previous benefit base. Each time the benefit is recalculated it is "locked in" and used as the new benefit base. 

The Guaranteed Lifetime Withdrawal Benefit provides an income for Bob and Alice that will last for both of their lifetimes.

Scenario 3: Travelling Retirees Who Want to Leave a Legacy 

Ted and JoAnne have been successfully retired for 10 years. They travel, spend time with their family and enjoy their lifestyle. They are thinking about how they can leave a legacy for their grandchildren and still maintain their lifestyles.

A variable annuity can help Ted and Joanne grow their money. They can add an enhanced death benefit option that will increase each year regardless of investment performance. 

Enhanced death benefit riders use a benefit base. For most death benefit riders, the benefit base starts out at the purchase payment. It increases by the higher of the account value or a percentage of the previous benefit base. 

Ted and Joanne can use their money if they need it, and still pass a legacy to their grandchildren.


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Is a Variable Annuity Right for Me?

Variable annuities are financial tools. Whether they are right for you depends on the job you want them to do. Here are some considerations:

  • Retirement Plans: Are you contributing the maximum to your employer's retirement plans?
  • Tax-deferred growth: This is a major benefit of annuities. Is tax control important to you? Can you benefit from tax-deferred growth?
  • Tax-free transfer: Transfer between subaccounts is ideal for investors who regularly rebalance their portfolios. Would you take advantage of this feature?
  • What type of investor are you? Are you willing to take on risk?
  • Variable annuities have surrender and tax penalties: Do you have adequate resources for emergencies and other short-term needs?
  • Variable annuities: They can guarantee an income for life. Do you want a fixed guaranteed income instead of income that may benefit from market returns?

What Should I Look for in a Variable Annuity?

Ratings: Financial strength of the insurance company is important. The primary rating services that cover insurance companies are A.M. Best, Moody’s, Standard & Poor, and Fitch. Each has its own style and methodology in coming up with their rating designations.  The rating each service assigns reflects their opinion on the insurance company's ability to pay claims. Review the ratings with your independent insurance agent

Surrender charges: The surrender period is usually 5 to 7 years. If it's longer, make sure you understand why. In any event it should not be longer than 10 years.

Fees and expenses: Fees and expenses with optional riders can be over 3%. Make sure you know what you are buying and why. Be sure to look at several companies and compare the fees.

What's Next?

Variable annuities can be an important part of your retirement plan. While they have many features and benefits, they are not for everyone. Talk to an independent insurance agent. They can help you decide if a variable annuity is right for you.

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Fundamentals of Investments Wilson & Hopkins

NAIC Buyers guide to deferred annuities

SEC guide to variable annuities



Fitch Ratings Definitions 

Moody’s Moody’s rating scale and definition

S&P Global Understanding Ratings

A.M. Best Why An A.M. Best Financial Rating Is Important

The American College of Trust and Estate Counsel State Survey of Asset Protection Techniques