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What is a Variable Annuity?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 October 2016
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    2003-2016
    Conjecture Corporation
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Variable annuities are a structure for life insurance policies that all for the investment of the underlying assets in a portfolio. The idea behind the life insurance annuity contract in general is to create a source of steady revenue for later in life. When the contract introduces the concept of a variable annuity based pay out, this changes to payments from a fixed amount to a variable amount.

When offering a variable annuity structure for a life insurance contract, the portfolio that serves as the underlying asset for the offering is usually made up of equity and debt securities. The securities have the potential to increase in value with time, thus generating a higher rate of return for policyholders. When this happens, the pay outs are adjusted to reflect the additional return, which can be a nice bonus for the policy holder.

At the same time, life insurance annuity contracts that make use of a variable format can be somewhat risky. Just as the underlying securities may increase in value, there is also the chance that the market will undergo a downturn. When this occurs, the pay out of the variable annuity to policyholders will be reduced accordingly. However, it should be noted that any type of investment would carry some degree of risk. In general, providers tend to make use of underlying securities that have demonstrated a reasonable amount of stability over the long term.

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When entering into a variable annuity contract, there is the option of selecting from several different payment schedules. The payouts may occur on a monthly, quarterly, or annual basis, once the terms of the contract are met. Most providers of this type of financial tool will include supporting documentation to demonstrate how the amount of the pay out was calculated. This allows the investor to determine if the variable annuity plan is working within expectations, or if a different type of arrangement would be a better option.

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