No investment product has created so much controversy and evoked so much criticism as the variable annuity.  The truth is, variable annuity products are as diverse as the agencies and  individuals who sell them.  However, there are several pros and cons common to most variable annuity products in existence today:


1) Income: The contract owner is able to lock in a future level of income regardless of the performance of the account.

2) Principal: The contract owner is able to receive the principal investment or the maximum contract value that has been acquired regardless of the value of the account.

3) Death Benefit: The contract heir/s is able to inherit the complete principal balance after the death of the contract owner.

4) Tax Deferral: All taxes are deferred on the increase of the assets with the annuity allowing the contract owner the additional advantage of greater compounding. Numerous critics state that large fees hamper the benefits of tax deferral. If the goal of purchasing the variable annuity is tax deferral, costly riders are able to waived so that the total fee amount will be no higher than the standard mutual fund.

5) Unlimited Contributions: There are contribution limits to retirement plans. If you receive a higher amount of money, the great sum of it will be ineligible for allocation in an IRA, 401K, etc. One of the most significant pros to annuities is that they do not have contribution limits.


1) Limited Investment Choices: There are limited options for asset allocation within an annuity.  Some of these contracts have prearranged balances whereas others may list a number of existing mutual funds.

2) High Fees: Several annuities possess optional riders that raise the total fees to over 3%. Many products permit the investor to choose to omit these options. If you are obtaining an annuity with exorbitant fees, you should have very important reasons to choose that particular annuity.

3) Immobility: The mixture of surrender charges and investment limitations means that the money that you save is not as mobile as it would otherwise be in a securities account.

4) Surrender Charges: Variable annuities impose surrender charges, generally during the first 5 to 7 years that you own the contract, so that the money becomes tied for a designated time period except for the typical 10% free withdrawal which is permitted annually.  Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax.  You should be absolutely certain, before purchasing the annuity, that the designated surrender schedule works with your determined period for investment.

5) Financial Institution Risk: The guarantee of the annuity is backed by the financial strength of the underlying insurance company.  Although other institutions generally agree to “step in” in the event of financial turmoil, annuity holders may experience delays or other difficulties in accessing their accounts

Before choosing to purchase a variable annuity, you should make sure that you have completely weighed the pros and cons. There are only certain investors who should purchase these annuities as they are not advantageous for everyone.