What is the investment risk with variable annuity and life insurance?

Compared to fixed annuity agreements whereupon the investment risk is borne by the insurance company, all variable products, including variable annuities and variable life insurance, the investment risk is assumed by the contract owner.

Variable Annuities - Risks and Benefits

• Unlike fixed annuities which grow at a fixed rate and offer a predictable rate of return, the rate of growth and the benefits of variable annuities vary according to the investment performance. Therefore, annuitants have the opportunity to gain a lot if the stock market conditions are favorable, or else, they stand the risk of bearing losses.
• Variable annuity buyers can choose from a variety of investment accounts in which to invest their premiums, including the insurer's general account.
• Variable annuities are investment vehicles working in a way similar to mutual funds. However, variables annuities are taxed in a different way and typically charge higher fees and loads than mutual funds.
• Under variable annuities the entire investment risk is borne by the contract owner. The only risk assumed by the insurance company, is the risk of fluctuations in mortality and expense rates.
• The majority of variable annuities have an assumed interest rate which the investment portfolio must earn in order for certain level benefit payments to be maintained. If the investment performance outstrips the assumed interest rate, the benefit payments will increase. However, there is the possibility that the selected investment will underperform - in which case, the benefit level will drop.

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