Variable Annuity: Are the Benefits Worth the Fees and Market Risk?

Would you accept investment losses and ongoing charges if an insurance contract offered a retirement benefit you could not easily create yourself?

That is the useful question behind a variable annuity. Among the types of annuities, the product can combine market exposure, tax deferral, and insurance features, but those features have conditions. Buying one because its brochure mentions both growth and protection leaves too much unexplained.

The decision starts with a specific need. Perhaps you want an optional income guarantee while retaining investment choices. Perhaps you want tax deferral outside an existing retirement plan. Those are different objectives, and a contract designed around one may be an expensive way to pursue the other.

Market prices fluctuate; an insurance feature does not necessarily protect the account balance.

Understand what changes with the market

A variable annuity typically provides a choice of all sorts of investments, known as subaccounts. Their ability to perform impacts a contract’s value. The variable part is unlike a traditional fixed agreement, which guarantees your initial investment.^⁠[5]

Assume that you invest $120,000 in some investments. If the value of their combined holdings drops by 15%, the total amount of money is $102,000 prior to the contract charges and withdrawals. Additionally, a brochure may reveal an income benefit. This does not reverse the $18,000 drop in the market to dollars that can be withdrawn.

Consider the concept of layers: investments affect the value of the account; contract provisions affect specific insurance benefits. Ask which figure appears on each statement and which figure could actually be paid if you leave. It can be easy to get them confused and make an annuity investment appear to be safer or more accessible than it really is.

Add the fees before judging the benefits

Charges can include the base insurance expense, administration, underlying investment expenses, and optional benefits. The SEC advises reviewing both the contract prospectus and the investment options’ prospectuses.^⁠[1] A quoted insurance charge alone may not represent the full annual cost.

The table below shows how charges build up using made up numbers. It represents the average annuity account size for $100,000 over 1 year and, for the sake of simplicity, assumes all percentages to refer to the account size of $100,000. Actual contracts are based on different bases, actual deductions, and actual methods of expenses.

Hypothetical annual costs on a constant $100,000 balance.

Charge	Assumed rate or amount	Annual cost
Base insurance expense	0.95%	$950
Administration	$50 annually	$50
Investment expenses	0.60%	$600
Optional income benefit	0.85%	$850
Combined illustration	2.45% equivalent	$2,450

These are teaching figures and not typical charges nor an estimate of a product quote. They demonstrate the value of a small fraction in dollar terms. Ask for a tailored fee breakdown such as incorporating income from an account value or from a separate benefit base.

Costs also differ considerably between products. Fidelity currently describes a variable contract with a 0.25% annual annuity charge below its stated $1 million threshold, additional fund expenses, and no surrender charges.^⁠[2] That example is not an endorsement; it demonstrates why broad claims that every contract has the same fee structure are unreliable.

Decide whether the insurance solves your problem

An optional lifetime withdrawal benefit may permit specified withdrawals even if poor investment performance eventually exhausts the account, provided its conditions are met. A death benefit addresses a different event: what a beneficiary receives after death. Neither feature should be assessed only by its name.^⁠[1]

Let’s take an example of a fictional income rider with a benefit base of $140,000 and a withdrawal factor of 5%. Multiplication gives $7,000 annually. It doesn’t mean that the owner of this contract will be able to give it up for $140,000. The actual amount is $105,000 which may be even less, after any required exit fees.

When can they start to be made, if both spouses are covered, what investment portfolios can be put into and what happens once they have exceeded the withdrawal amount, etc. Request a written example of a bad outcome, including an early cash need. A benefit which is only useful when conditions aren’t met is of little use.

The financial capacity of the issuing insurance company is also a part of the guarantee. It’s not a certainty that the investments won’t suffer losses. Look closely at the name of the issuer, as they may be different from the seller’s name when the two are different.

See how costs affect a long holding period

For a different illustration mathematically, suppose that $100,000 is invested for 10 years with no withdrawals and no taxes. This will amount to approximately $179,085 at a fixed net annual return of 6%. At 4% net, it reaches about $148,024. The gap is just about $31,000.

This comparison is not a forecast of any market returns or a reproduction of any contract’s deduction mechanics. It reflects the sum of a smaller net effect. Despite this, insurance may still be worth the money, but the premiums can be compared to what the other option would have been if you didn’t have insurance.

Don’t contrast an insured technique with a theoretical stock market investment that earns substantial, steady profits, and where investors behave perfectly. Conversely, don’t think that all added protection is worth the cost. Talk about what you would do without that protection and if you could maintain it in a rough market.

Keep tax deferral in perspective

Tax deferral postpones a tax bill; it does not necessarily eliminate one. For nonqualified contracts, distributions generally draw taxable earnings before recovering the owner’s investment when taken before annuitization. Different rules can apply once payments are annuitized.^⁠[3]

An annuity account inside an IRA does not create a second layer of tax deferral.^⁠[1] The reason for using insurance there would need to rest on other features. An additional federal tax can also apply to taxable early distributions, subject to exceptions and the applicable account rules.^⁠[4]

Before transferring funds, consult a tax expert who can compare the arrangement with the existing one. Determine the source of funds, gains that have already occurred, timing of distribution, and keep basis records. Discuss the after-tax result and handle it as a new result to get to sales.

Plan for the year you need cash

Even if the primary reason for your annuity investment is retirement, liquidity is important. Other products do not have a surrender period or have a shorter one, with some set at eight years or more. Read the schedule; don’t assume either end of the extremes.

Assume that an unforeseen repair will cost $25,000. If that entire withdrawal is accompanied by a hypothetical 6% surrender charge, this just surrender charge, alone, would be $1,500. Reductions in insurance benefits and taxes may not be linked. A contractual withdrawal allowance may change the calculation, so ask for the exact dollar result.

Don’t include emergency savings or planned expenditures in the budget amount you’re thinking of putting down. This is not a “normal” reserve percentage. It’s a real-world example of how there are things you need to do that you can’t wait for markets to come back or restrictions to blow over.

Be careful when replacing an existing contract

A new illustration may look better because it highlights one feature while leaving out something valuable in the old contract. Texas insurance guidance recommends examining the costs of replacement.^⁠[6] That review should include existing benefits, current surrender charges, new restrictions, and the sales compensation involved.

A qualifying exchange can defer recognition of certain gains, but it does not erase economic costs.^⁠[3] Do not cancel existing coverage based only on a verbal assurance. Obtain a comparison that explains what you lose as clearly as what you gain.

Test the contract against a difficult year

Suppose retirement is three years away, markets plummet drastically and the employer reduces working hours. Consider if you could use the proposed contract to fund your normal expenses. Next, think about the investments that are allowed under its income rider and whether they are the types of risks that you can withstand.

Make the proposal under another scenario in which you never avail the optional income benefit. Would you still allow themselves to be charged with that protection? You don’t need to have a claim for insurance to be valuable, but know what you are transferring to insurance.

Last, determine who will take on the reading each year and what adjustments might be needed. A contract can be useful when purchasing a home, but it can be less helpful after the move, on major life changes such as an inheritance or divorce, or retirement. Have a record of why you chose it and date it. Also know who can be there to help you understand the contract if your initial adviser moves on.

LIMRA reported $17.9 billion in traditional variable sales during the second quarter of 2026, 25% above the previous year’s comparable quarter.^⁠[7] Increased sales do not establish suitability; the household analysis still needs to stand on its own.

Make the decision in ordinary language

Before choosing among the types of annuities, explain what the annuity is for. For example: You would like investments which could fluctuate along with a defined insurance benefit, and you are okay with the restrictions and cost. If this statement does not reflect your goal, then reconsider the proposed design.

Enlist the help of insurer Money Man 4 Integrity with the insurance questions and include an appropriately licensed securities professional for a variable contract. Take the prospectus, fee table and benefit illustrations. The good thing that comes of this is that you should have made a decision that you can explain without the help of a headline return or an undefined guarantee.

General education only; not individualized financial or tax advice. Guarantees depend on the issuing insurer’s claims-paying ability and the applicable contract terms.