Variable Annuities

Variable Annuities ## Fixed vs. Variable Annuities An annuity is a contract with an insurance company where you make contributions (lump sum or periodic payments), the money grows tax-deferred, and the company promises to pay you an income stream in the future — typically in retirement. The two main types differ fundamentally in where the money is invested and who bears the investment risk. Fixed annuity: Your money goes into the insurance company's general account, and the insurer guarantees a fixed rate of return. The insurance company bears all investment risk. Even if the insurer's portfolio performs poorly, you still receive your guaranteed rate. Fixed annuities are regulated primarily as insurance products — a state insurance license is sufficient to sell them. Variable annuity: Your money is allocated to subaccounts — investment portfolios similar to mutual funds. Returns fluctuate with subaccount performance. The investor bears the investment risk. Returns could be +15% in a good year or −20% in a bad year. Because variable annuities involve securities risk, they are regulated as both securities and insurance products — a registered representative must hold a Series 6 or Series 7 license AND a state insurance license to sell them. --- ## The Separate Account This is the defining structural feature of variable annuities. The separate account holds the assets underlying variable annuity subaccounts. It is legally segregated from the insurance company's general account (which backs fixed annuities and the insurer's own obligations). This segregation is critical: if the insurance company becomes insolvent, the separate account assets cannot be seized by the company's creditors. Think of it this way: the general account is the insurance company's operating bank account. The separate…