Life Insurance

Navigating Variable Life Annuities: What You Need to Know

Ethos Life | Jun 3, 2024
Variable Life Annuities

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.

Variable life annuities are a type of investment product designed to provide individuals with a stream of income in retirement while also offering the potential for investment growth. They combine features of both insurance and investment accounts, making them a complex but potentially rewarding financial tool.

In 2023, though annuity sales had a record year overall, variable annuity (VA) sales reached $51.4 billion, a 17% decrease from the previous year, according to LIMRA. The risky nature of variable life annuities make them less popular, but if you’re shopping for life insurance and other protections for your loved ones, it’s important to understand all of your options. Learn more about how variable life annuities work, the pros and cons, and how it compares to fixed annuities and life insurance.

What are variable life annuities?

Variable life annuity life insurance is a contract between an individual and an insurance company. The individual makes a lump sum payment or a series of payments to the insurer, and in return, the insurer agrees to make periodic payments to the individual starting either immediately or at a future date. The "variable" aspect refers to the fact that the payouts depend on the performance of investments chosen by the policyholder.

These investments are typically a selection of mutual fund-like sub-accounts, which can include stocks, bonds, and money market instruments. The value of the annuity and the income it generates can fluctuate based on the performance of these underlying investments.

How does a variable annuity work?

A variable annuity involves a contract between an investor (the annuitant) and an insurance company. The annuitant makes a lump sum payment or a series of payments to the insurer. In return, the insurer agrees to provide periodic payments to the annuitant starting either immediately or at a future date.

Key phases of a variable annuity

  1. Accumulation phase: This is the period during which the annuitant makes payments (also known as premiums) into the annuity. The premiums are invested in a selection of sub-accounts chosen by the annuitant. These sub-accounts function similarly to mutual funds and can include various asset classes such as stocks, bonds, and money market instruments. The value of the annuity during this phase fluctuates based on the performance of the chosen investments.
  2. Payout phase: This phase begins when the annuitant starts receiving payments from the annuity. The payments can be structured in various ways, including:

    • Lifetime income: Payments continue for the lifetime of the annuitant.
    • Fixed period: Payments are made for a specified period, such as 10 or 20 years.
    • Combination: Payments for a lifetime or a specified period, whichever is longer.

Investment options and performance

The returns on a variable annuity depend on the performance of the investments in the chosen sub-accounts. The annuitant can typically allocate premiums across different sub-accounts based on their risk tolerance and investment objectives. For example:

  • Equity sub-accounts: Invest in stocks and aim for higher growth, but come with higher risk.
  • Bond sub-accounts: Focus on fixed-income securities, offering more stable returns but potentially lower growth.
  • Money market sub-accounts: Provide safety and liquidity with minimal risk but low returns.

The value of the annuity will rise and fall with the market value of the sub-accounts. This means the annuity can potentially grow more than fixed annuities but also carries the risk of losing value.

Fees and charges

Variable annuities often come with various fees and charges, including:

  • Management fees for managing the investment sub-accounts.
  • Mortality and expense risk charges to compensate the insurer for the insurance risks they assume
  • Administrative fees to cover the costs of maintaining the annuity
  • Surrender charges, which are applied if the annuitant withdraws funds early, typically within the first several years

Riders and additional features

To enhance the benefits and manage risks, insurers offer optional riders that can be added to the annuity contract, usually at an additional cost:

  • Guaranteed Minimum Income Benefit (GMIB): Ensures a minimum income regardless of market performance.
  • Guaranteed Minimum Withdrawal Benefit (GMWB): Allows the annuitant to withdraw a certain percentage of the invested amount annually, even if the account value drops.
  • Death benefit: Guarantees a minimum payout to beneficiaries if the annuitant dies before the payout phase begins.

Potential returns

The returns on a variable life annuity are not guaranteed and can vary widely. The potential for higher returns exists, especially if the investments perform well over time. Unlike fixed annuities, which offer guaranteed payouts, variable annuities can potentially offer higher returns due to their exposure to equity markets and other growth-oriented investments.

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Managing risks

The main risk associated with variable life annuities is that returns are not guaranteed. Much like other stock market-driven investments, since payouts depend on market performance, there's a chance that the value of the annuity could decrease if the investments perform poorly. That said, there are some strategies that can help manage these risks:

  1. Diversification: Spreading investments across different asset classes can help mitigate the risk of any single investment performing poorly.
  2. Riders: Many insurance companies offer riders (additional features) that can provide guaranteed minimum income benefits or death benefits, adding a layer of security.
  3. Regular monitoring and adjustments: Periodically reviewing and adjusting the investment allocations can help align the annuity with changing market conditions and personal risk tolerance.
  4. Professional advice: Consulting with a financial advisor can provide personalized strategies to balance potential returns with acceptable levels of risk.

Who is a good candidate for variable life annuities?

Variable life annuities are suitable for individuals who:

  • Seek growth potential: Those looking for higher returns than what fixed annuities or traditional savings accounts can offer.
  • Have a long-term horizon: Investors who can tolerate market fluctuations and are investing for the long term.
  • Are in higher tax brackets: Since earnings in a variable annuity grow tax-deferred, they can be beneficial for individuals looking to manage their taxable income.
  • Require flexible payout options: Those who want the flexibility of choosing from various payout options, including lifetime income or fixed period payments.

Pros and Cons

To help you weigh the benefits and risks of getting a variable life annuity, here are some of the key pros and cons.


  • Potential for higher returns: Offers the opportunity to earn more than traditional fixed-income investments.
  • Tax-deferred growth: Investment earnings grow tax-deferred until withdrawal, which can be advantageous for long-term growth.
  • Flexible payout options: Various payout options can be tailored to meet different retirement income needs.
  • Death benefits: Some variable annuities include a death benefit, ensuring that beneficiaries receive a specified amount.


  • Market risk: Investments are subject to market fluctuations, and poor performance can reduce the annuity's value.
  • Higher fees: Variable annuities often come with higher fees and expenses compared to other investment products, including management fees, mortality and expense risk charges, and administrative fees.
  • Complexity: These products can be complicated to understand, making it difficult for investors to fully grasp their potential benefits and risks.
  • Surrender charges: Early withdrawal can incur significant penalties, reducing liquidity.

Comparing Variable Annuities, Fixed Annuities, and Life Insurance

When planning for financial security and retirement, individuals often consider a variety of products including variable annuities, fixed annuities, and life insurance policies. Each of these financial instruments serves different purposes, comes with distinct features, and suits different financial goals. Here's a comparative look at these three products:

Variable Annuity:

Primary purpose: Retirement income with investment growth

Investment risk: High, depends on market performance

Potential returns: Variable, potentially high

Tax treatment: Tax-deferred growth

Flexibility: High, various investment options and riders

Complexity: High, due to investment choices and riders

Fees and expenses: High, includes management fees, rider fees

Fixed Annuity:

Primary purpose: Guaranteed retirement income

Investment risk: Low, guaranteed returns

Potential returns: Fixed, stable but lower

Tax treatment: Tax-deferred growth

Flexibility: Low, fixed returns and payments

Complexity: Low, straightforward terms and payouts

Fees and expenses: Low to moderate, depending on the terms

Life Insurance:

Primary purpose: Financial protection for beneficiaries

Investment risk: Varies (none for term life insurance, low to moderate for permanent)

Potential returns: Cash value growth (permanent policies)

Tax treatment: Death benefit typically tax-free; cash value tax-deferred

Flexibility: Varies (high for universal life, low for whole life)

Complexity: Varies by policy type

Fees and expenses: Moderate to high, especially for permanent policies

Is variable life annuity life insurance right for you?

Variable life annuities offer a unique combination of investment potential and retirement income, making them an attractive option for certain investors. However, they come with risks and costs that must be carefully considered. By understanding the intricacies of these products and employing strategies to manage associated risks, individuals can better decide if variable life annuities align with their financial goals and risk tolerance. Consulting with a financial advisor can also provide valuable insights tailored to an individual's specific situation.

Regardless, for the majority of people concerned about leaving their loved ones financially secure, life insurance is a good first layer of protection. But if you’re also looking for financial security for your later years, you may wish to supplement your social security life insurance, and other retirement investments with an annuity.

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