What is a variable annuity?

A variable annuity is an insurance contract whose value rises and falls with investment subaccounts you choose, similar to mutual funds. It is a registered security, sold with a prospectus, and it can lose value. Optional riders can add guaranteed income or death benefits for an annual fee.

What are the fees on a variable annuity?

All-in costs commonly reach 2%–3.5% a year: a mortality and expense charge of about 1%–1.4%, subaccount fund expenses of 0.2%–1%+, an administrative charge, and any riders at 0.5%–1.5% each. Surrender charges typically run six to eight years on top.

Are variable annuities a good idea?

They can make sense for a high earner who has already maxed out a 401(k) and IRA, has a long horizon, wants tax-deferred growth, and buys a low-cost contract with index subaccounts. They are usually a poor idea in an IRA, for short horizons, or when the fees consume much of the expected return.

Can you lose money in a variable annuity?

Yes. Subaccounts carry full market risk, so your account value can fall below what you paid, and fees continue to be deducted in down years. Only an optional rider — paid for annually — provides a floor, and it usually applies to income or death benefits rather than to your account value.

What is the difference between a variable annuity and a mutual fund?

The investments are similar; the wrapper is not. A variable annuity adds tax deferral, optional insurance guarantees, surrender charges and higher fees, and taxes gains as ordinary income with no step-up in basis for heirs. A taxable mutual fund account is cheaper, fully liquid and eligible for long-term capital gains rates.

What is a GLWB rider?

A guaranteed lifetime withdrawal benefit lets you withdraw a set percentage of a separately tracked benefit base for life, even if the account value falls to zero. It costs roughly 1% a year, the benefit base is not cash you can take, and exceeding the permitted withdrawal can reduce or void the guarantee.

Annuity guide

Variable annuities

A variable annuity puts your money into market investments inside an insurance contract. Your balance can grow with the market and it can fall — the insurance part only guarantees what you pay extra for. It is the most complex and generally the most expensive annuity type, and it is the one where reading the prospectus genuinely changes decisions.

Last updated September 19, 2026 · Reviewed against our editorial methodology

What a variable annuity is

Unlike a fixed annuity, a variable annuity makes no promise about your account value. Your premium goes into subaccounts — pooled investment portfolios resembling mutual funds — and your balance follows their performance minus the contract's charges.

Because it carries investment risk, a variable annuity is a registered security. It is sold with a prospectus and regulated by the SEC and FINRA as well as state insurance departments. The seller must be securities-licensed, and suitability standards apply. That extra layer of regulation exists because the product is complicated and has a long history of being sold badly.

Subaccounts and how value moves

You choose an allocation across subaccounts — US equity, international, bond, target volatility, money market. The contract may restrict your choices if you buy a living benefit rider, because the insurer limits equity exposure to protect its guarantee. Value moves with the underlying holdings, charges are deducted whatever happens, and there is no floor unless a rider provides one.

The fee stack

Charge	Typical annual cost	What it pays for
Mortality & expense risk (M&E)	1.0% – 1.4%	Insurance guarantees, distribution, insurer profit
Administrative charge	0.1% – 0.3%, or a flat annual fee	Recordkeeping
Subaccount fund expenses	0.2% – 1.2%+	Investment management inside each subaccount
Living benefit rider (GLWB)	0.9% – 1.5%	Guaranteed lifetime withdrawals
Enhanced death benefit rider	0.3% – 0.8%	A minimum payout to beneficiaries
Surrender charge	Up to ~7%, declining over 6–8 years	Recovering the commission the insurer already paid

Low-cost variable annuities do exist, sold directly or through fee-only advisers, with M&E charges near 0.2%–0.3%, index subaccounts and no surrender period. If tax-deferred growth is your actual goal, these are the versions worth looking at.

Living benefit and death benefit riders

GLWB / GMWB. A guaranteed lifetime withdrawal benefit tracks a separate benefit base, often stepped up to market highs on anniversaries or rolled up at a stated rate, and permits withdrawals of perhaps 4%–6% of that base for life, even if the account value hits zero. Important limits: the base is not cash, withdrawing more than the permitted amount can reduce or cancel the guarantee, and the fee is normally charged on the base, so it can exceed 1% of your actual account value.

Enhanced death benefit. Guarantees beneficiaries at least your premiums, or a high-water account value, even after market losses. A term life policy is often cheaper for a healthy buyer whose real goal is legacy.

GMIB. An older guaranteed minimum income benefit converts a benefit base into income at fixed annuitisation rates. Always compare the resulting dollar income with a current SPIA quote; the guarantee only helps if it beats what the open market offers when you need income.

Tax treatment

Growth is tax-deferred; there is no annual contribution limit.
You can switch subaccounts without triggering tax, unlike a taxable brokerage account.
Withdrawn gains are taxed as ordinary income, not at capital gains rates, and come out first.
Withdrawals before 59½ can face a 10% additional tax.
Heirs get no step-up in basis on the gain.
Inside an IRA the wrapper adds no tax benefit at all — you are paying insurance charges for deferral you already had.

Variable vs RILA vs fixed index

	Variable	RILA (buffered)	Fixed index
Downside	Full market loss	Loss beyond a 10%–20% buffer	None from the index
Upside	Uncapped market return	Capped, but higher than FIA	Capped, lowest of the three
Explicit fees	Highest	Usually low or none on the base	None on the base
Registered security	Yes	Yes	No

When a variable annuity fits

A reasonable case exists when all of the following are true:

You have already maxed out your 401(k), IRA and HSA options.
You are in a high bracket now and expect a lower one when you withdraw.
Your horizon is long enough — usually 15 years or more — for deferral to outweigh fees.
You are buying a low-cost contract, or you specifically want and understand a rider.
The money is not needed before 59½.

Weak cases: buying inside an IRA for "tax deferral," buying for principal protection that the product does not actually offer without a rider, or buying a fully loaded contract with a seven-year surrender charge shortly before you need income. If protection is the goal, a fixed index annuity or a MYGA is the more honest fit.

If you already own one

Request a fee breakdown in dollars for the last twelve months.
Check whether the surrender period has expired — after that, exit is free.
Value any rider you hold. Older contracts sometimes carry guarantees far better than anything sold today; surrendering those can be a costly mistake.
If you want out and there is a gain, a 1035 exchange into a lower-cost annuity avoids immediate tax. Be sceptical of an exchange that restarts a surrender schedule and pays a fresh commission.
Have a fee-only adviser who earns nothing from the outcome review it.

Questions to ask

What is the total annual cost in dollars, including every rider and fund expense?
What is the full surrender schedule?
Is the rider fee charged on the account value or the benefit base?
What withdrawal would breach the guarantee, and what happens if it does?
Which subaccounts am I restricted to because of the rider?
How much commission does this contract pay, and is there a lower-cost share class?

Frequently asked questions

What is a variable annuity?: A variable annuity is an insurance contract whose value rises and falls with investment subaccounts you choose, similar to mutual funds. It is a registered security, sold with a prospectus, and it can lose value. Optional riders can add guaranteed income or death benefits for an annual fee.
What are the fees on a variable annuity?: All-in costs commonly reach 2%–3.5% a year: a mortality and expense charge of about 1%–1.4%, subaccount fund expenses of 0.2%–1%+, an administrative charge, and any riders at 0.5%–1.5% each. Surrender charges typically run six to eight years on top.
Are variable annuities a good idea?: They can make sense for a high earner who has already maxed out a 401(k) and IRA, has a long horizon, wants tax-deferred growth, and buys a low-cost contract with index subaccounts. They are usually a poor idea in an IRA, for short horizons, or when the fees consume much of the expected return.
Can you lose money in a variable annuity?: Yes. Subaccounts carry full market risk, so your account value can fall below what you paid, and fees continue to be deducted in down years. Only an optional rider — paid for annually — provides a floor, and it usually applies to income or death benefits rather than to your account value.
What is the difference between a variable annuity and a mutual fund?: The investments are similar; the wrapper is not. A variable annuity adds tax deferral, optional insurance guarantees, surrender charges and higher fees, and taxes gains as ordinary income with no step-up in basis for heirs. A taxable mutual fund account is cheaper, fully liquid and eligible for long-term capital gains rates.
What is a GLWB rider?: A guaranteed lifetime withdrawal benefit lets you withdraw a set percentage of a separately tracked benefit base for life, even if the account value falls to zero. It costs roughly 1% a year, the benefit base is not cash you can take, and exceeding the permitted withdrawal can reduce or void the guarantee.

Sources

U.S. Securities and Exchange Commission, Investor.gov — Variable annuities and Updated Investor Bulletin.
FINRA — Variable annuities: fees, exchanges and suitability rules (Rule 2330).
Internal Revenue Service — Publication 575; Section 1035 exchanges.
Product prospectuses for representative variable annuity contracts, checked at the date shown above.