Variable Annuities

What You Should Know

Information is an investors best tool

WHAT YOU SHOULD KNOW | 1

2 | VARIABLE ANNUITIES

Variable Annuities
Variable annuities have become a part of the retirement
and investment plans of many Americans. Before you buy
a variable annuity, you should know some of the basics
and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.
This is a general description of variable annuitieswhat
they are, how they work, and the charges you will pay.
Before buying any variable annuity, however, you should
find out about the particular annuity you are considering. Request a prospectus from the insurance company
or from your financial professional, and read it carefully.
The prospectus contains important information about
the annuity contract, including fees and charges, investment options, death benefits, and annuity payout options.
You should compare the benefits and costs of the annuity
to other variable annuities and to other types of investments, such as mutual funds.
U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, DC 20549-0213
Telephone: (800) 732-0330
www.investor.gov

WHAT YOU SHOULD KNOW | 1

Table of Contents
WHAT IS A VARIABLE ANNUITY?. . . . . . . . . . . . . . . . . 3
HOW VARIABLE ANNUITIES WORK . . . . . . . . . . . . . . . 5
The Accumulation Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Payout Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

THE DEATH BENEFIT AND OTHER FEATURES. . . . . . . 8

VARIABLE ANNUITY CHARGES. . . . . . . . . . . . . . . . . 10
TAX-FREE 1035 EXCHANGES. . . . . . . . . . . . . . . . . 13
BONUS CREDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ASK QUESTIONS BEFORE YOU INVEST. . . . . . . . . . . 17
FOR MORE INFORMATION. . . . . . . . . . . . . . . . . . . . . 19

2 | VARIABLE ANNUITIES

What Is a Variable Annuity?

A variable annuity is a contract between you and an insurance
company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future
date.You purchase a variable annuity contract by making either
a single purchase payment or a series of purchase payments.
A variable annuity offers a range of investment options. The
value of your investment as a variable annuity owner will vary
depending on the performance of the investment options you
choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market
instruments, or some combination of the three.
Although variable annuities are typically invested in mutual
funds, variable annuities differ from mutual funds in several
important ways:
FIRST,

variable annuities let you receive periodic payments

for the rest of your life (or the life of your spouse or any other
person you designate). This feature offers protection against
the possibility that, after you retire, you will outlive your assets.

SECOND,

variable annuities have a death benefit. If you die

before the insurer has started making payments to you, your
beneficiary is guaranteed to receive a specified amounttypically at least the amount of your purchase payments.Your beneficiary will get a benefit from this feature if, at the time of your
death, your account value is less than the guaranteed amount.

THIRD, variable annuities are tax-deferred. That means you pay

no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer
your money from one investment option to another within a
variable annuity without paying tax at the time of the transfer.
When you take your money out of a variable annuity, however,
you will be taxed on the earnings at ordinary income tax rates
WHAT YOU SHOULD KNOW | 3

CAUTION!
Other investment vehicles, such as IRAs and employer-sponsored
401(k) plans, also may provide you with tax-deferred growth and
other tax advantages. For most investors, it will be advantageous
to make the maximum allowable contributions to IRAs and 401(k)
plans before investing in a variable annuity.
In addition, if you are investing in a variable annuity through a taxadvantaged retirement plan (such as a 401(k) plan or an IRA), you
will get no additional tax advantage from the variable annuity. Under
these circumstances, consider buying a variable annuity only if it
makes sense because of the annuitys other features, such as
lifetime income payments and death protection. The tax rules that
apply to variable annuities can be complicatedbefore investing,
you may want to consult a tax adviser about the tax consequences
to you of investing in a variable annuity.
Remember
Variable annuities are designed to be long-term investments, to
meet retirement and other long-range goals. Variable annuities are
not suitable for meeting short-term goals because substantial taxes
and insurance company charges may apply if you withdraw your
money early. Variable annuities also involve investment risks, just
as mutual funds do.

rather than lower capital gains rates. In general, the benefits of

tax deferral will outweigh the costs of a variable annuity only
if you hold it as a long-term investment to meet retirement
and other long-range goals.

4 | VARIABLE ANNUITIES

How Variable Annuities Work

A variable annuity has two phases: an accumulation phase and a
payout phase.
THE ACCUMULATION PHASE

During the accumulation phase, you make purchase payments,

which you can allocate to a number of investment options. For
example, you could designate 40% of your purchase payments
to a bond fund, 40% to a U.S. stock fund, and 20% to an international stock fund. The money you have allocated to each
mutual fund investment option will increase or decrease over
time, depending on the funds performance. In addition, variable annuities often allow you to allocate part of your purchase
payments to a fixed account. A fixed account, unlike a mutual
fund, pays a fixed rate of interest. The insurance company may
reset this interest rate periodically, but it will usually provide a
guaranteed minimum (e.g., 3% per year).
Your most important source of information about a variable annuitys investment options is the prospectus. Request
the prospectuses for the mutual fund investment options. Read
them carefully before you allocate your purchase payments
among the investment options offered. You should consider a
EXAMPLE
You purchase a variable annuity with an initial purchase payment of
$10,000. You allocate 50% of that purchase payment ($5,000) to a
bond fund, and 50% ($5,000) to a stock fund. Over the following
year, the stock fund has a 10% return, and the bond fund has a 5%
return. At the end of the year, your account has a value of $10,750
($5,500 in the stock fund and $5,250 in the bond fund), minus fees
and charges.
WHAT YOU SHOULD KNOW | 5

variety of factors with respect to each fund option, including the funds investment objectives and policies, management
fees and other expenses that the fund charges, the risks and
volatility of the fund, and whether the fund contributes to the
diversification of your overall investment portfolio. The SECs
online publication, Mutual Fund Investing: Look at More Than a
Funds Past Performance, provides information about these factors. Another SEC publication, Invest Wisely: An Introduction to
Mutual Funds, provides general information about the types of
mutual funds and the expenses they charge.
During the accumulation phase, you can typically transfer your
money from one investment option to another without paying
tax on your investment income and gains, although you may be
charged by the insurance company for transfers. However, if you
withdraw money from your account during the early years of the
accumulation phase, you may have to pay surrender charges,
which are discussed below. In addition, you may have to pay a 10%
federal tax penalty if you withdraw money before the age of 59.
THE PAYOUT PHASE

At the beginning of the payout phase, you may receive your

purchase payments plus investment income and gains (if any)
as a lump-sum payment, or you may choose to receive them as
a stream of payments at regular intervals (generally monthly).
If you choose to receive a stream of payments, you may have
a number of choices of how long the payments will last. Under
most annuity contracts, you can choose to have your annuity
payments last for a period that you set (such as 20 years) or for an
indefinite period (such as your lifetime or the lifetime of you and
your spouse or other beneficiary). During the payout phase, your
annuity contract may permit you to choose between receiving
payments that are fixed in amount or payments that vary based
on the performance of the mutual fund investment options.
6 | VARIABLE ANNUITIES

The amount of each periodic payment will depend, in part,

on the time period that you select for receiving payments. Be
aware that some annuities do not allow you to withdraw money from your account once you have started receiving regular
annuity payments.
In addition, some annuity contracts are structured as immediate annuities, which means that there is no accumulation
phase and you will start receiving annuity payments right after
you purchase the annuity.

WHAT YOU SHOULD KNOW | 7

The Death Benefit and

Other Features
A common feature of variable annuities is the death benefit. If
you die, a person you select as a beneficiary (such as your spouse
or child) will receive the greater of: (i) all the money in your
account, or (ii) some guaranteed minimum (such as all purchase
payments minus prior withdrawals).
Some variable annuities allow you to choose a stepped-up
death benefit. Under this feature, your guaranteed minimum
death benefit may be based on a greater amount than purchase
payments minus withdrawals. For example, the guaranteed minimum might be your account value as of a specified date, which
may be greater than purchase payments minus withdrawals if the
underlying investment options have performed well. The purpose of a stepped-up death benefit is to lock in your investment performance and prevent a later decline in the value of
your account from eroding the amount that you expect to leave
to your heirs. This feature carries a charge, however, which will
reduce your account value.
Variable annuities sometimes offer other optional features,
which also have extra charges. One common feature, the

EXAMPLE
You own a variable annuity that offers a death benefit equal to
the greater of account value or total purchase payments minus
withdrawals. You have made purchase payments totaling $50,000.
In addition, you have withdrawn $5,000 from your account.
Because of these withdrawals and investment losses, your account
value is currently $40,000. If you die, your designated beneficiary
will receive $45,000 (the $50,000 in purchase payments you put in
minus $5,000 in withdrawals).
8 | VARIABLE ANNUITIES

CAUTION!
You will pay for each benefit provided by your variable annuity. Be
sure you understand the charges. Carefully consider whether you
need the benefit. If you do, consider whether you can buy the
benefit more cheaply as part of the variable annuity or separately
(e.g., through a long-term care insurance policy).

guaranteed minimum income benefit, guarantees a particular

minimum level of annuity payments, even if you do not have
enough money in your account (perhaps because of investment losses) to support that level of payments. Other features
may include long-term care insurance, which pays for home
health care or nursing home care if you become seriously ill.
You may want to consider the financial strength of the insurance company that sponsors any variable annuity you are considering buying. This can affect the companys ability to pay any
benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed
minimum income benefit, long-term care benefit, or amounts
you have allocated to a fixed account investment option.

WHAT YOU SHOULD KNOW | 9

Variable Annuity Charges

You will pay several charges when you invest in a variable annuity. Be sure you understand all the charges before you invest.
These charges will reduce the value of your account and the return on your investment. Often, they will include the following:
Surrender charges

If you withdraw money from a variable annuity within a certain

period after a purchase payment (typically within six to eight
years, but sometimes as long as ten years), the insurance company usually will assess a surrender charge, which is a type of
sales charge.This charge is used to pay your financial professional
a commission for selling the variable annuity to you. Generally,
the surrender charge is a percentage of the amount withdrawn,
and declines gradually over a period of several years, known as
the surrender period. For example, a 7% charge might apply
in the first year after a purchase payment, 6% in the second year,
5% in the third year, and so on until the eighth year, when the
surrender charge no longer applies. Often, contracts will allow
you to withdraw part of your account value each year10% or
EXAMPLE
You purchase a variable annuity contract with a $10,000 purchase
payment. The contract has a schedule of surrender charges,
beginning with a 7% charge in the first year, and declining by 1%
each year. In addition, you are allowed to withdraw 10% of your
contract value each year free of surrender charges. In the first year,
you decide to withdraw $5,000, or one-half of your contract value
of $10,000 (assuming that your contract value has not increased or
decreased because of investment performance). In this case, you
could withdraw $1,000 (10% of contract value) free of surrender
charges, but you would pay surrender charge of 7%, or $280, on the
other $4,000 withdrawn.
10 | VARIABLE ANNUITIES

15% of your account value, for examplewithout paying a surrender charge.

Mortality and expense risk charge

This charge is equal to a certain percentage of your account value, typically in the range of 1.25% per year. This charge compensates the insurance company for insurance risks it assumes under
the annuity contract. Profit from the mortality and expense risk
charge is sometimes used to pay the insurers costs of selling the
variable annuity, such as a commission paid to your financial professional for selling the variable annuity to you.
EXAMPLE
Your variable annuity has a mortality and expense risk charge at an
annual rate of 1.25% of account value. Your average account value
during the year is $20,000 so you will pay $250 in mortality and
expense risk charges that year.

Administrative fees

The insurer may deduct charges to cover record-keeping and other administrative expenses. This may be charged as a flat account
maintenance fee (perhaps $25 or $30 per year) or as a percentage
of your account value (typically in the range of 0.15% per year).
EXAMPLE
Your variable annuity charges administrative fees at an annual rate
of 0.15% of account value. Your average account value during the
year is $50,000. You will pay $75 in administrative fees.

WHAT YOU SHOULD KNOW | 11

Underlying Fund Expenses

You will also indirectly pay the fees and expenses imposed by the
mutual funds that are the underlying investment options for your
variable annuity.
Fees and Charges for Other Features

Special features offered by some variable annuities, such as a

stepped-up death benefit, a guaranteed minimum income benefit,
or long-term care insurance, often carry additional fees and charges.
Other charges, such as initial sales loads, or fees for transferring part of your account from one investment option to another, may also apply. You should ask your financial professional
to explain to you all charges that may apply. You can also find
a description of the charges in the prospectus for any variable
annuity that you are considering.

12 | VARIABLE ANNUITIES

Tax-Free 1035 Exchanges

Section 1035 of the U.S. tax code allows you to exchange an
existing variable annuity contract for a new annuity contract
without paying any tax on the income and investment gains
in your current variable annuity account. These tax-free exchanges, known as 1035 exchanges, can be useful if another
annuity has features that you prefer, such as a larger death benefit, different annuity payout options, or a wider selection of
investment choices.
You may, however, be required to pay surrender charges on
the old annuity if you are still in the surrender charge period. In
addition, a new surrender charge period generally begins when
you exchange into the new annuity. This means that, for a significant number of years (as many as 10 years), you typically will
have to pay a surrender charge (which can be as high as 9% of
your purchase payments) if you withdraw funds from the new
annuity. Further, the new annuity may have higher annual fees
and charges than the old annuity, which will reduce your returns.
CAUTION!
If you are thinking about a 1035 exchange, you should compare
both annuities carefully. Unless you plan to hold the new annuity for
a significant amount of time, you may be better off keeping the old
annuity because the new annuity typically will impose a new surrender
charge period. Also, if you decide to do a 1035 exchange, you should
talk to your financial professional or tax adviser to make sure the
exchange will be tax-free. If you surrender the old annuity for cash and
then buy a new annuity, you will have to pay tax on the surrender.

WHAT YOU SHOULD KNOW | 13

Bonus Credits
Some insurance companies are now offering variable annuity
contracts with bonus credit features. These contracts promise
to add a bonus to your contract value based on a specified percentage (typically ranging from 1% to 5%) of purchase payments.
EXAMPLE
You purchase a variable annuity contract that offers a bonus credit
of 3% on each purchase payment. You make a purchase payment of
$20,000. The insurance company issuing the contract adds a bonus
of $600 to your account.

CAUTION!
Variable annuities with bonus credits may carry a downside,
howeverhigher expenses that can outweigh the benefit of the
bonus credit offered.

Frequently, insurers will charge you for bonus credits in one

or more of the following ways:
Higher surrender charges

Surrender charges may be higher for a variable annuity that pays

you a bonus credit than for a similar contract with no bonus credit.
Longer surrender periods

Your purchase payments may be subject to surrender charges

for a longer period than they would be under a similar contract
with no bonus credit.

14 | VARIABLE ANNUITIES

Higher mortality and expense risk charges and other charges

Higher annual mortality and expense risk charges may be deducted for a variable annuity that pays you a bonus credit. Although the difference may seem small, over time it can add up.
In addition, some contracts may impose a separate fee specifically to pay for the bonus credit.
Before purchasing a variable annuity with a bonus credit, ask
yourselfand the financial professional who is trying to sell you
the contractwhether the bonus is worth more to you than any
increased charges you will pay for the bonus. This may depend
on a variety of factors, including the amount of the bonus credit
and the increased charges, how long you hold your annuity contract, and the return on the underlying investments. You also
need to consider the other features of the annuity to determine
whether it is a good investment for you.
EXAMPLE
You make purchase payments of $10,000 in Annuity A and $10,000
in Annuity B. Annuity A offers a bonus credit of 4% on your purchase
payment, and deducts annual charges totaling 1.75%. Annuity B has
no bonus credit and deducts annual charges totaling 1.25%. Lets
assume that both annuities have an annual rate of return, prior to
expenses, of 10%. By the tenth year, your account value in Annuity
A will have grown to $22,978. But your account value in Annuity
B will have grown more, to $23,136, because Annuity B deducts
lower annual charges, even though it does not offer a bonus.

You should also note that a bonus may only apply to your
initial premium payment, or to premium payments you make
within the first year of the annuity contract. Further, under some
annuity contracts the insurer will take back all bonus payments
made to you within the prior year or some other specified period if you make a withdrawal, if a death benefit is paid to your
beneficiaries upon your death, or in other circumstances.
WHAT YOU SHOULD KNOW | 15

CAUTION!
If you already own a variable annuity and are thinking of exchanging
it for a different annuity with a bonus feature you should be careful.
Even if the surrender period on your current annuity contract has
expired, a new surrender period generally will begin when you
exchange that contract for a new one. This means that by exchanging
your contract, you will forfeit your ability to withdraw money from
your account without incurring substantial surrender charges. And
as described above, the schedule of surrender charges and other
fees may be higher on the variable annuity with the bonus credit
than they were on the annuity that you exchanged.

EXAMPLE
You currently hold a variable annuity with an account value of
$20,000, which is no longer subject to surrender charges. You
exchange that annuity for a new variable annuity, which pays a 4%
bonus credit and has a surrender charge period of eight years, with
surrender charges beginning at 9% of purchase payments in the
first year. Your account value in this new variable annuity is now
$20,800 minus 9% of your $20,000 purchase payment, or $19,000.
This is $1,000 less than you would have received if you had stayed
in the original variable annuity, where you were no longer subject to
surrender charges.

16 | VARIABLE ANNUITIES

Ask Questions Before You Invest

Financial professionals who sell variable annuities have a duty
to advise you as to whether the product they are trying to sell
is suitable to your particular investment needs. Dont be afraid
to ask them questions. And write down their answers, so there
wont be any confusion later as to what was said.
Variable annuity contracts typically have a free look period
of ten or more days, during which you can terminate the contract without paying any surrender charges and get back your
purchase payments (which may be adjusted to reflect charges
and the performance of your investment). You can continue to
ask questions in this period to make sure you understand your
variable annuity before the free look period ends.
Before you decide to buy a variable annuity, consider the following questions:
 ill you use the variable annuity primarily to save for retireW
ment or a similar long-term goal?
 re you investing in the variable annuity through a retirement
A
plan or IRA (which would mean that you are not receiving
any additional tax-deferral benefit from the variable annuity)?
 re you willing to take the risk that your account value may
A
decrease if the underlying mutual fund investment options
perform badly?
Do you understand the features of the variable annuity?
 o you understand all of the fees and expenses that the variD
able annuity charges?
 o you intend to remain in the variable annuity long enough
D
to avoid paying any surrender charges if you have to withdraw money?
WHAT YOU SHOULD KNOW | 17

I f a variable annuity offers a bonus credit, will the bonus outweigh any higher fees and charges that the product may charge?
 re there features of the variable annuity, such as long-term care
A
insurance, that you could purchase more cheaply separately?
 ave you consulted with a tax adviser and considered all the
H
tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status in retirement?
I f you are exchanging one annuity for another one, do the
benefits of the exchange outweigh the costs, such as any surrender charges you will have to pay if you withdraw your
money before the end of the surrender charge period for the
new annuity?
Remember
Before purchasing a variable annuity, you owe it to yourself to learn
as much as possible about how they work, the benefits they provide,
and the charges you will pay.

18 | VARIABLE ANNUITIES

For More Information

Youll find on the SECs websitewww.sec.gova vast array
of educational materials that explain how the securities industry works and provides information on avoiding costly mistakes
and fraud. Some of these publications are also available in print
form. To have a print brochure mailed to you, call the Federal
Citizen Information Center toll-free number, (888) 878-3256.
Or you can order publications online through their website,
http://pueblo.gsa.gov.
Questions you should ask about all of your
investments, the people who sell them to you, and what to do
if you run into problems. Available in print form.

Ask Questions

Tells you how to get background information about your broker or investment adviser,
including prior employment history and disciplinary actions.

Check Out Brokers and Advisers

Basic information about investing in mutual funds. Much of this information applies to variable annuities, as well. Available in
print form.

Invest Wisely: An Introduction to Mutual Funds

Mutual Fund Investing: Look at More Than a Funds Past

Describes some of the factors you should

consider in choosing a mutual fund.
Performance

WHAT YOU SHOULD KNOW | 19

Youll also find helpful information on these websites:

FINRA is
an independent self-regulatory organization charged with
regulating the securities industry, including sellers of variable annuities. FINRA has issued several investor alerts on
the topic of variable annuities, which you can find online at
www.finra.org. FINRA also periodically issues Notices to
Members, reminding them of their responsibilities to investors in selling various products, including variable annuities. If
you have a complaint or problem about sales practices involving variable annuities, you should contact the District Office
of FINRA nearest you. A list of FINRA District Offices is
available in the Contact Us section of FINRAs web site at
www.finra.org.

Financial Industry Regulatory Authority (FINRA)

The
NAIC is the national organization of state insurance commissioners. Variable annuities are regulated by state insurance
commissions, as well as by the SEC. The NAICs web site at
www.naic.org contains an interactive map of the United States
with links to the home pages of each state insurance commissioner. You may contact your state insurance commissioner
with questions or complaints about variable annuities.

National Association of Insurance Commissioners (NAIC)

20 | VARIABLE ANNUITIES

Notes

WHAT YOU SHOULD KNOW | 21

22 | VARIABLE ANNUITIES

WHAT YOU SHOULD KNOW | 23

How to Contact the SEC with

Questions or Complaints
Contact the SECs Office of Investor Education and Advocacy
for help. If you have access to the Internet, you can send us
your complaint by using our online complaint form at www.
sec.gov/complaint.shtml. Or you can reach us as follows:

U.S. Securities and Exchange Commission

Office of Investor Education and Advocacy
100 F Street, NE
Washington, DC 20549-0213
Telephone: (800) 732-0330
www.investor.gov

24 | VARIABLE ANNUITIES

WHAT YOU SHOULD KNOW | 25

1-800-732-0330
www.investor.gov
SEC Pub. 011 (09/07)

26 | VARIABLE ANNUITIES