Are Variable Annuities Securities?

The broadest use case for variable annuities is as a supplemental retirement savings vehicle. For investors who have high incomes or substantial taxable assets, the variable annuity can shelter savings from taxes when other tax-deferred or tax-free savings options (401(k), HSA, IRA, 529) are maxed out or not viable strategies. Variable annuities have no hard contribution limit and therefore can accommodate large deferrals. In other circumstances, normal tax-deferred accounts will usually offer better investment options and lower costs.

The exception to this would be the addition of an income rider on the variable contract. However, costs must be carefully reviewed to ensure the benefits of guaranteed growth or income aren’t erroded by fees.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

Why Variable Annuities Are Considered Securities

It’s important to remember that annuities are not investments; they are insurance products that are typically purchased from carriers or providers.

For this reason, they are typically regulated at the state level and not considered securities since they are essentially an exchange of money for a product.

But variable annuities operate quite differently.

These annuities come with notably more risk — including the possibility of losing your principal — in exchange, allowing you to directly invest in things like stocks and bonds through mutual funds.

Due to how they function, and the level of risk attached, variable annuities are considered securities. 

Since variable annuities are regulated by the SEC, you will need to work with an agent who is licensed to sell securities to purchase one. 

It’s also important to note that variable annuities don’t make sense for everyone as they are different from the straightforward and low-risk choices of SPIAs or MYGAs.

How Variable Annuities Compare to Other Types of Securities

Variable annuities function differently than other types of annuities. They are more similar to brokerage accounts.

When you purchase a variable annuity, your payments are essentially invested into a portfolio. This portfolio is often made up of mutual funds, allowing you to invest in and possibly benefit from things like stocks and bonds.

You can then manage the amount and distribution toward different types of investments.

Variable annuities essentially provide you access to investing in other types of securities. 

Why Are Other Types of Annuities Not Considered Securities?

Other types of annuities are not considered securities because they do not overtly function as investments and don’t include exposure to market risk.

Financial Instruments That Are Not Securities

• Most annuities
• Cash
• Checks
• Interest in a deposit account

Source: Tennessee Department of Commerce & Insurance

Other types of annuities are more straightforward, operating more like a transaction.

With fixed or immediate annuities, you typically pay a premium for the product in exchange for receiving growth at a set rate along with eventual lifetime payments.

There is little risk involved with these types since your principal is protected and you are not directly exposed to market risk.

The only other type of annuity where the market plays a key role is a fixed index annuity. Still, this operates within a controlled environment where your annuity growth is tied to the performance of an index. You are not at risk of losing your initial premium with a fixed index annuity.

While other types of annuities are not securities, they are still regulated at the state level.

How Much Risk Do Variable Annuities Carry?

Variable annuities have a heightened risk because they don’t guarantee principal protection, and growth can depend on the performance of your investments.

The trade-off is the potential for more growth than you would see in a traditional annuity product. For this reason, variable annuities tend to make sense for a different audience than something like a SPIA or MYGA.

Say that you are saving for retirement and have already maxed out contributions to your 401(k) or IRA. You could consider purchasing a variable annuity as another vehicle to keep working toward increasing your retirement savings.

While the risk is higher, you can achieve different goals than with other traditional annuity options.

Most other types of annuities are aimed toward conservative investors since they offer principal protection and allow for growth in a predictable and controlled environment.