A variable annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. You can choose to invest your purchase payments in a range of investment options, which are typically mutual funds. The value of your account in a variable annuity will vary, depending on the performance of the investment options you have chosen.
Variable annuities often also offer many features including:
- Tax deferral on earnings;
- A death benefit that will pay to your beneficiary a specified amount – typically at least the amount of your purchase payments – if you die before the insurer has started making payments to you; and
- The option of receiving a stream of periodic payments for either a definite period such as 20 years, or for an indefinite period such as your lifetime or the life of your spouse.
Variable annuities also often offer optional living benefit features that provide certain protections for payouts, withdrawals or account values, against the effect of investment losses and/or unexpected longevity.