For any investor interested in variables products it is important that you have variable annuities explained properly. The variable annuity product initially came out as a way for individuals to attempt to hedge themselves against inflation. As most annuity products offer a fixed income payout based on your account type, the effects of decreasing purchasing power of the dollar can really erode away account value.
Although this is not a perfect metric, the insurance companies felt that offering the ability for their clients to invest in their own set of individuals stocks would allow for the account to offset the effects of inflation. The account value and payments would fluctuate depending upon the success of the investment portfolio associated with the account. As such, the account would grow during portfolio increases, and decrease with poor stock performance.
Because of the nature of the product and the risk of investors trying to play the stock market, variable annuities have very stringent restrictions on early withdrawal or surrender of the account. These strict guidelines make it very difficult to get your funds out of the annuity should the need arise.
Surrender charges, overselling by agents, underperforming accounts, and a number of other variables have given variable annuity accounts quite a deal of bad press. The majority of warnings about annuities are directed at variable annuities.
Proponents of variable annuities feel that this is the best way to hedge your money against the risks of inflation. With a properly diversified portfolio, and a conservative investment approach, the variable annuity can allow you to keep up with changes in cost of living. For seniors living on a fixed income, this can be vital to their continuing solvency.
Understand that variable annuities are not for the faint of heart. Before undertaking any variable contract, you should fully understand the terms of the product. Because their results are driven by performance, the variable annuity carries a certain degree of greater risk.