Q&A: When to consider a variable annuity

October 3, 2008

I've been reading a lot about variable annuities recently. When does investing in one make sense?

Q: I've been reading a lot about variable annuities recently. When does investing in one make sense?

A: For most people, a variable annuity is not a good investment. First, let's define what it is: an insurance contract that, rather than providing fixed payments like conventional annuities, allows for an investment in mutual funds and therefore carries greater risk/reward potential. Because a variable annuity is wrapped in insurance contracts, earnings are tax-deferred and accounts aren't subject to annual contribution limits. For most people, simply investing in mutual funds makes more sense because fees are lower. In most states, though, annuities are credit-protected, so money invested in them is safe from lawsuits. If you fear a malpractice suit, it may be worth your while to look into a variable annuity.