variable annuity
An annuity whose value and payout varies based on the performance of underlying investment subaccounts chosen by the policyholder, combining insurance with investment.
Example
“The variable annuity invested in stock subaccounts for growth, with a guaranteed minimum withdrawal benefit as a safety net.”
Memory Tip
VARIABLE annuity = annuity with investment options. Returns VARY with the market. Complex and often expensive.
Why It Matters
Variable annuities matter because they offer a way to save for retirement while potentially growing your money through market investments, rather than receiving fixed payments. Understanding how they work helps you decide if the combination of insurance protection and investment growth aligns with your retirement goals and risk tolerance.
Common Misconception
Many people assume that variable annuities guarantee a minimum return or protect them from losing money, similar to fixed annuities. In reality, your payout can decrease significantly if the underlying investments perform poorly, which means you bear the market risk rather than the insurance company.
In Practice
Suppose you invest $100,000 in a variable annuity and choose subaccounts focused on stock funds. If those funds grow to $150,000 over five years, your annuity value and eventual payments increase accordingly. However, if a market downturn causes those same funds to drop to $75,000, your annuity value decreases and your retirement income from this investment would be lower than expected.
Etymology
VARIABLE (changing, based on market performance) ANNUITY. An ANNUITY with VARIABLE (market-linked) returns.
Common Misspellings
Build your retirement portfolio with low fees
Related Terms
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See Also
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