What is a variable annuity?

Find out how a financial solution like a variable annuity can help grow your retirement savings, provide guaranteed income and protect you in retirement.

You have complex and unique financial needs during retirement, from maintaining a desirable standard of living to securing long-term care, or even leaving a legacy. Find out how a variable annuity can help address these needs and complement your existing retirement strategies.

A variable annuity is a type of insurance contract that combines investment with retirement income protection. Variable annuities are invested in what are called subaccounts, which are tied to underlying investments similar to mutual funds, bond funds or money market funds. This means that variable annuities can offer higher rates of return than fixed annuities, which pay a fixed rate of interest. Variable annuities may be a good option if you fear inflation will erode the value of your retirement savings.

How does a variable annuity work?

When you purchase an annuity, you agree to make contributions either on an ongoing basis or as a lump-sum during what is called “the contribution phase.” The insurance company takes that money and invests it in subaccounts, which you choose based on the available investment options. At some future time specified in the annuity contract (also known as the “distribution phase,”) the insurance company sends you payments based on the performance of the underlying investment. Payments may be made for a specified length of time or until your death, depending on the terms of your contract.

5 factors to consider with a variable annuity

Here are some fundamental considerations when evaluating how a variable annuity might complement your retirement strategy.

It can provide lifetime income

When uncertainty looms, adding a variable annuity with a living benefit rider to your financial strategy has advantages. The living benefit rider guarantees a stream of income up until your death.

This remains true even if your contract value falls to zero or your portfolio takes a hit after a poor sequence of returns. A living benefit does come with a cost, but the guarantee it offers could be worth the investment — especially with market volatility.

You can add a living benefit rider to a variable annuity. This gives you the opportunity to efficiently maximize your income base growth. This benefit is designed for stronger guaranteed income, even when plans change.

It can help cover illness and long-term care

According to the National Council on Aging, nearly 95% of adults age 65 or older in the U.S. has at least one chronic condition, and nearly 80% of has two or more.¹ The U.S. Department of Health and Human Services revealed the average 65-year-old today has a 70% chance of needing some type of long-term care in their remaining years.²

You can benefit from considering a solution that helps manage these future possibilities. Adding a living benefit rider to a variable annuity can offer the security of lifetime payments. Other riders for long-term care may allow flexibility by using part of your policy to pay for long-term care while you are still living. It's another way you can reduce risk in your retirement strategy.

It’s flexible as your needs change

A lot can change in 10 years: unexpected illness, job loss, divorce or even the loss of a spouse. All these could affect you between the time you purchase an annuity and when you're ready to take income. These are difficult but important factors to consider and why you may need more flexible options as you plan for retirement.

Some variable annuities can come with lifetime income benefits that help manage life's "what-ifs." If you add a living benefit, you won't be locked into irreversible choices when life happens. You can make a better decision for yourself when your situation improves.

It can help fill potential legacy planning gaps

If your legacy planning needs aren't fully covered by your existing life insurance policy, consider a variable annuity's death benefit. A variable annuity is invested — and hopefully reaping the benefits of time in the market. So, your contract value is more likely to last well into retirement.

This increases the likelihood of passing a death benefit on to loved ones and may offer a better outcome compared to other fixed solutions. Certain variable annuities may offer death benefit options that let you lock in additional death benefits to help you achieve your legacy goals.

It may offer more than your current annuity

With more competitive rates, now might be a great time to review your existing guaranteed retirement income amounts. This can help ensure you're on track to get the highest payout possible. If it's in your best interest to make the switch, consider looking into a 1035 Exchange. You can use it to transfer funds from an existing policy to a new one without tax implications. Your existing annuity solution might not be the most efficient or comprehensive. A variable annuity is designed to deliver more guaranteed income, more flexibility for when life happens and more legacy planning solutions for you.

Pros and cons of variable annuities

When deciding if a variable annuity is right for you, consider some of the pros and cons of this type of financial tool.

Pros

Variable annuities offer tax deferred growth on your contributions, so you don’t pay taxes on earnings until you begin to receive payouts, at which time they are taxed as ordinary income at your effective tax rate at the time of distribution.
Depending on the contract, annuities can offer income up until the time of your death, providing assurance that you will not run out of income prior to your death.
Variable annuities allow you to choose your own investments from a given number of options provided by the insurance company. This has the potential for your money to earn higher returns than fixed annuities.
Variable annuities offer optional riders that make them more customizable to fit your needs, whether it’s returning the principal to your beneficiaries upon the time of your death or providing the flexibility to take needed withdrawals during your lifetime.

Cons

Designed to serve as a long-term investment option, variable annuities do not offer extensive flexibility for accessing your money. In most cases, withdrawals from funds prior to the payout period are subject to fees and penalties.
Variable annuities can be subject to a number of fees, investment expenses and potential surrender charges, all of which can reduce your returns on the investment.
Riders that increase the flexibility of annuities come with an additional cost.
Earnings on variable annuities are often capped. As a result, other long-term investment options may offer a greater return in an era of high market performance.

Is a variable annuity right for you?

If you're interested in a solution that provides the opportunity for tax-deferred, market-based growth and options for guaranteed lifetime income, you may want to consider a solution like a variable annuity. Contact your financial professional to learn more about this option and how it may be able to meet your retirement goals.

Explore these additional topics as you consider annuities:

As you determine what annuity might be right for you, remember they are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity's remaining death benefit, contract value, cash surrender value and future earnings. Withdrawals from annuities may also be subject to income tax and, if taken prior to age 59 ½, an additional 10% IRS tax penalty may apply. Because Protective and its representatives do not offer legal or tax advice, it is important that you talk with your own legal and tax advisor about your specific tax situation.Variable annuities are considered securities contracts and are regulated by federal securities laws and must be sold with a prospectus.

Investors should carefully consider the investment objectives, risks, charges and expenses of a variable annuity, any optional protected lifetime income benefit, and the underlying investment options before investing. This and other information is contained in the prospectuses for a variable annuity and its underlying investment options. Investors should read the prospectuses carefully before investing.

Sources:

1. Get the Facts On Healthy Aging, National Council on Aging, May 9, 2025.

2. Long-term Services & Supports, Long-Term Care, ASPE.

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