The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 17. Variable Annuities

On The Surface, investors' appetite for variable annuities (VAs) appears to be increasing. In 2004, sales exceeded $50 billion, and the total dollar amount of VAs outstanding exceeded $1 trillion.^[158] Just two years later, by the end of 2006, that amount had swelled to $1.4 trillion.^[159]

One possible explanation is that the word annuity conveys safety and steady streams of income. However, that halo effect should apply only to fixed annuities. Another plausible explanation is that the sales of VAs are not due to actual demand for the product. Instead, they reflect the successful efforts of commission-based salesmen and investment advisers. In other words, they are products that are sold, not bought.

A VA is a mutual fund-like account wrapped inside an insurance contract that can be purchased by making either a single outlay or a series of payments. VAs differ from fixed annuities in that fixed annuities guarantee that a specific sum of money will be paid each period, generally on a monthly basis, regardless of fluctuations in the value of the annuity issuer's underlying investments. However, the value of a VA (and thus the amount that can ultimately be withdrawn) will fluctuate over time. In addition, unlike with a fixed annuity, the typical VA offers many different investment options (typically mutual funds called subaccounts that can be managed by firms other than the issuer).

There are two types of VAs. One is called a deferred (or accumulating