The policy is backed by the insurers' general investment account and credits interest to your account. This interest accumulates tax-deferred until withdrawn. The rate of return varies depending on prevailing interest rates. When the annuity reaches the end of its surrender charge period, the investor can continue the contract, receive a lump sum or receive a set amount of income on a regular schedule, depending on the payout option chosen by the owner. The annuity's value may vary depending on investment performance.
All subaccount gains accumulate tax-deferred until withdrawn.
Variable annuities are often invested in the stock market, which can be more risky but may offer higher potential returns than fixed annuities. With qualified annuities, the amount invested is usually tax-deductible, and subject to IRS contribution limits. With non-qualified annuities, the investment funds have already been taxed, and there is no limit on contributions. Periodic premium annuities, usually permitting flexible premium payments that vary in amount, are also very popular. Most annuities purchased today contain several life annuity features.