All Things Annuities Deferred Annuities

What is a Variable Annuity?

Variable Annuity Overview


If you have a general understanding of stocks and mutual funds, then the growth aspect of a variable annuity should be reasonably simple.

Variable annuity owners can invest in the stock market via sub-accounts, which are essentially mutual funds.

Mutual funds and annuity sub-accounts

Therefore, the growth will depend on the performance of those underlying funds.

Unlike fixed annuity products, your contract value will fluctuate daily, and there is no guaranteed return on the cash value of your contract.

Annual Fees

Since Variable Annuities have both investment and insurance aspects, there is a layer of fees to be aware of.

You’ll find a breakdown of each fee for you to reference below…

Mortality & Expense Fee

  • Frequently referred to as the “M&E” fee. The insurance company assesses this fee for the “risk” that they take on.
  • This fee covers the standard death benefit
  • M&E fees can range anywhere from 0.10% – 1.85%. The average tends to be about 1.25% 

Administration Fee

  • This fee covers ongoing service and contract maintenance.
  • This fee ranges anywhere from .10%-0.30%. 


Insurance companies will generally quote the Mortality & Expense Fee and the Admin fee together.

Sub-account Fee(s)

  • These are the fees for the underlying mutual fund(s) you invest in. 
  • The industry average is often quoted at about 1%. 
  • You can find your exact fund fees your annuity product’s prospectus, which you can find on the insurance company’s website.

The fees referenced are standard fees associated with Variable Annuities; rider fees are not included.

Insurance Aspects

Income Options: Annuitization is required for the guaranteed income stream to take effect unless an income rider is purchased and added to the contract.

Available Riders: Death Benefit Riders, a wide variety of Living Benefit Riders (Income Riders), LTC Riders, Principal Protection Riders, and Liquidity Riders.

Living benefit riders

  • Guaranteed Minimum Income Benefits (GMIBs)
  • Guaranteed Lifetime Withdrawal Benefits (GLWBs)
  • Guaranteed Minimum Accumulation Benefit (GMABs are specifically for Variable Annuities).

Some Living Benefit Riders restrict the type of sub-accounts contract owners can invest in. 

Living benefit riders are especially popular in Variable Annuities because they’re often sold as a tool to “hedge” the market.

pros and cons of a variable annuity

The thought behind that pitch boils down to the fact that the rider’s income base value isn’t affected by market volatility. Therefore, annuitants would essentially, recoup market losses in the form of income. 

Some would argue that by adding a Living Benefit Rider to Variable Annuities (VAs), you’re essentially transferring the risk of market volatility to the insurance company.

In this case, I’ve actually found this to be true a few times, but in older contracts with Living Benefit riders, that was more fruitful and is no longer being offered today. *Comparison post coming soon!


You can add multiple riders to annuity contracts, just keep in mind each rider often has it’s own fee. I’ve seen total annual fees on a few Variable annuities as high as 5.15% due to the added riders and baseline fees. Yikes! 

Death Benefit

  • The “standard” death benefit for Variable Annuities is the higher of the contract value or the premiums paid minus any withdrawals.
  • Death Benefit Riders are available for these products.

Surrender Cost(s)

  • Surrender Schedule: Surrender schedules for VAs can range anywhere from as low as four years to 10 years. 
  • Pro-Rated Rider fees: This fee will apply whether or not you are in the surrender penalty period.

Each contribution made to the contract follows its own surrender schedule. See below:

annuity surrender

All in all, you have a better opportunity for higher returns than other types of annuity products, but beware of high annual fees that can eat away at your growth and resulting in fixed-like returns anyways.

Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.

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