Five Situations Where a Variable Annuity Might Make Sense

You have maxed out your 401(k), fully funded your IRA, and still have investable dollars you want to put to work on a tax-advantaged basis. Where do you turn? For some investors, a variable annuity is a legitimate answer, though it is far from universal.

Variable annuities are among the most debated products in financial planning. Critics point to layered fees, surrender charges, and complexity. Those criticisms are valid. But dismissing the product entirely ignores a subset of investors for whom the features genuinely solve a problem. Below are five situations where a variable annuity may warrant consideration, along with a clear look at when it probably does not.

You Have Already Maxed Out Every Other Tax-Advantaged Account

Tax-deferred growth is one of the primary benefits of a variable annuity. Unlike a 401(k) or IRA, there is no annual IRS contribution limit on non-qualified annuity premiums. That makes a variable annuity worth evaluating once you have contributed the maximum to your employer-sponsored retirement plan, your traditional or Roth IRA, and any HSA available to you.

The key distinction is sequencing. A variable annuity should generally not replace contributions to accounts that offer tax deductions, employer matching, or tax-free withdrawals. It belongs later in the lineup, after those higher-priority vehicles are fully utilized. If you still have surplus savings earmarked for long-term growth, the tax deferral inside a variable annuity can allow your investment gains to compound without annual tax drag.

You Want Optional Living or Death Benefit Guarantees

Variable annuities offer something most brokerage accounts cannot: optional riders that guarantee a minimum income stream or a minimum death benefit regardless of market performance. These riders come at an additional cost, often ranging from 0.50% to over 1.00% annually on top of base contract charges. But for certain investors, the guarantee is worth the premium.

A guaranteed lifetime withdrawal benefit (GLWB) rider, for example, can provide a floor of income in retirement even if the subaccount investments decline. A death benefit rider can ensure that heirs receive at least the amount originally invested (or a stepped-up value) if the contract owner passes away during a market downturn. These features are not free, and they are not always necessary. But for an investor who wants market participation with a contractual safety net, riders can fill a planning gap that a standard investment portfolio does not address on its own.

Your Time Horizon Is Long Enough to Absorb the Costs

The fee structure of a variable annuity is one of its most important considerations. A typical contract includes mortality and expense (M&E) charges, administrative fees, underlying subaccount management fees, and any optional rider costs. Combined, total annual expenses can reach 2.00% to 3.00% or more, depending on the contract and riders selected.

These costs create a meaningful drag on returns. For a variable annuity to potentially outperform a taxable investment account on an after-tax basis, the investor generally needs a holding period long enough for the benefit of tax deferral to offset the higher internal expenses. Many analyses suggest this crossover point can be ten years or longer, though the exact timeline depends on tax rates, investment returns, and the specific contract.

This means variable annuities tend to be more appropriate for investors in their 40s or 50s who plan to hold the contract well into retirement, rather than for someone who might need access to the funds within a few years.

You Are Looking for Structured Retirement Income With Market Upside

Some investors approaching retirement want more than a fixed payment. They want their retirement income to have the potential to grow with the market while still offering predictability. Variable annuities with income riders can provide this combination.

Through subaccount investing, contract holders allocate premiums across a menu of investment options that function similarly to mutual funds. These subaccounts invest in equities, bonds, or blended strategies, giving the investor exposure to market growth. When paired with a living benefit rider, the result is a product that participates in market gains while offering a contractual income floor.

This structure is not the same as a guaranteed return. Subaccount values fluctuate with market conditions, and the income guarantees are only as strong as the claims-paying ability of the issuing insurance company. But for an investor who wants to stay invested in the market while building a retirement income framework, this combination can serve a purpose.

You Have a Specific Estate Planning or Legacy Goal

Variable annuities offer death benefit options that can simplify the transfer of assets to beneficiaries. The most basic death benefit guarantees that heirs receive the greater of the contract value or total premiums paid. Enhanced death benefit riders can lock in periodic high-water marks, potentially preserving gains even if the market declines before the owner’s death.

It is important to note that annuity death benefits are generally paid as ordinary income to beneficiaries, not at a stepped-up cost basis like many inherited securities. This tax treatment is a meaningful disadvantage. However, in situations where the contract owner prioritizes a guaranteed minimum legacy amount over tax efficiency, or where the annuity complements other estate planning tools, the death benefit feature can play a useful role.

When a Variable Annuity Is Likely Not Suitable

Honesty about suitability matters just as much as identifying the right fit. Variable annuities are generally not appropriate in the following situations:

• Short time horizons. Surrender charges typically apply for the first several years of a contract, and the fee drag needs time to be offset by tax deferral. If you anticipate needing the funds within five to seven years, a variable annuity is unlikely to be the right vehicle.
• Lower tax brackets. The tax-deferral benefit is most valuable for investors in higher income tax brackets. If you expect to be in a low bracket both now and in retirement, the deferral benefit may not justify the added cost.
• Unfunded qualified accounts. If you have not yet maximized contributions to your 401(k), IRA, or other tax-advantaged accounts, those vehicles should generally come first due to their lower costs and, in many cases, additional tax benefits.
• Liquidity needs. Withdrawals before age 59½ are generally subject to a 10% federal tax penalty in addition to ordinary income tax on gains. Variable annuities are designed for long-term commitments.
• Discomfort with market risk. Subaccount investments are subject to market volatility. While optional riders can provide income or death benefit floors, the underlying account value itself is not guaranteed and can lose value.

Understanding What You Are Paying For

Before purchasing a variable annuity, request a complete breakdown of all fees. This should include the M&E charge, administrative fees, subaccount expense ratios, and the cost of any optional riders. Compare this total annual cost against the projected value of the tax deferral and any guarantees over your expected holding period.

A financial advisor can model these scenarios using your specific tax situation, time horizon, and income needs. This analysis is essential because the suitability of a variable annuity depends heavily on individual circumstances.

The Bottom Line

Variable annuities are not inherently good or bad. They are complex contracts with real costs and real benefits. The question is whether the features you are paying for, including tax deferral, market participation, and optional guarantees, align with a specific need in your financial plan that other, simpler products cannot address.

If you find yourself in one of the five situations described above, a conversation with a qualified financial advisor about the role a variable annuity could play is a reasonable next step. If none of these scenarios apply, there is likely a more cost-effective way to pursue your goals.

This content is for informational purposes only and does not constitute personalized investment advice. Variable annuities involve investment risk, including the possible loss of principal. Guarantees are subject to the claims-paying ability of the issuing insurance company. All investing involves risk. Past performance does not guarantee future results. Please consult a qualified financial professional before making any investment decisions.

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Ronald Briggs FIC, CRPC® Briggs Financial Group

(810) 522-6685 www.bfgwealthadvisors.com

Financial Professional Ronald J. Briggs Jr, FIC, CRPC®, is an industry veteran with over four decades of experience. As the founder of Caitlin John Private Wealth Management, a Fiduciary based Registered Investment Advisor firm established in late 2010, the inspiration and namesake of Caitlin John was conceived from Ron and his wife Kristin’s two children’s middle names. The vision then and future legacy was to build a fiduciary-based advisory firm to continue serving his clients and future generations grow his practice. The boutique feel and personalized experience that Ron’s clients felt spread to other Advisors both locally and nationally and enabled the Firm to grow exponentially to this date. Each of these Advisors came to Caitlin John to be part of our “FIDUCIARY” and independent Registered Investment Advisor (RIA) firm with their own individual brand and identity they built in their local community. With that being said, Ron and his Team of Tax and Risk mitigation experts are proud to announce the Briggs Financial Group, Wealth Advisors (BFG) serving Ron’s personal clients across the US, with its dual national headquarters located in Brighton, Michigan and Bonita Springs, Florida.