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Sound Advice: February 25, 2026

Why should you buy a variable annuity?

A variable annuity is a niche tool, not a default “should buy” product, and it tends to make sense only for specific, narrow situations rather than as a general investment.

What a variable annuity is

  • It is an insurance contract where your money is invested in market‑linked subaccounts (similar to mutual funds), and the value fluctuates with market performance.
  • In exchange, you get insurance features such as tax‑deferred growth, optional lifetime income, and often a death benefit for beneficiaries.

When it can be reasonable

  • You have maxed out other tax‑advantaged accounts (401(k), IRA, HSA, etc.) and still want additional tax‑deferred growth for long‑term retirement money.
  • You value specific insurance riders (e.g., guaranteed lifetime withdrawal benefit or enhanced death benefit) enough to justify the extra cost and complexity.

Major drawbacks you must weigh

  • Fees are often high and layered (mortality and expense charges, fund expenses, rider costs, and sometimes wrap fees), which can easily add up to several percent per year and significantly drag returns.
  • Contracts are complex and illiquid, with surrender charges and tax penalties for early withdrawals, plus ordinary‑income tax on gains rather than long‑term capital‑gains treatment.

Questions to ask before buying

  • “What is the all‑in annual cost (including M&E, fund expenses, and riders), and how does that compare to a low‑cost portfolio plus term insurance?”
  • “What problem is this solving that I cannot more simply solve with existing accounts, a diversified portfolio, and, if needed, separate insurance?”

Bottom line

  • You “should” consider a variable annuity only if you have a long time horizon, high risk tolerance, have already used simpler tax shelters, and place high value on specific guarantees.
  • In most cases, it is better to start by assuming you do not need a variable annuity and then force the product (or salesperson) to prove it fills a very clear, well‑defined gap in your plan.

 

 

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