Best Variable Annuities and Rates – A 2025 Guide for Potential Investors

Introduction

As an investor exploring various annuity options, understanding variable annuities and their associated rates is crucial for making informed decisions. Unlike fixed annuities, variable annuities offer no stated interest rate, as returns depend on the performance of the underlying investment options. In this article, we’ll discuss how to shop for the best variable annuity rates and explain why there’s no definitive “best” rate due to the nature of these investment products.

Variable Annuities

Variable annuities provide the potential for higher returns based on the performance of underlying investments, typically a selection of mutual funds. Unlike fixed annuities, variable annuities do not guarantee a specific interest rate; instead, returns vary based on how well the underlying investment options perform. Also, unlike fixed annuities, variable annuities use “separate accounts” for their investments, meaning your principal and returns are directly exposed to market risk rather than backed by the insurer’s general account. This can lead to higher potential returns, but also a greater risk of loss.

In this article, we will explore how to find the best variable annuity and explain why there is no single "best" rate, given the nature of these investment products.

Factors affecting variable annuity include:

Investment performance: The rate of return depends on the performance of the investment sub-accounts chosen by the annuitant. Diversifying your investments across different asset classes and sectors can help reduce risk and potentially increase returns.

Fees and charges: Variable annuities often have higher fees than other types, which can impact the overall return. These fees can include management fees, mortality and expense risk charges, and surrender charges. Be sure to understand all the fees associated with a variable annuity before committing to a contract.

Additional features: Optional riders, such as guaranteed minimum income benefits or death benefits, can affect the overall performance. These riders can provide a safety net, but often come at an additional cost.
Market Volatility: Since the returns are linked to market-based investments, periods of high volatility can result in fluctuating account values and returns.
Insurance Company Solvency: The ability to pay guaranteed benefits (including rider guarantees) ultimately depends on the insurer’s financial health. Even though investments are in separate accounts, benefit payments are subject to the company’s claims-paying ability.

Weighing the Trade-offs of Variable Annuities

Variable annuities are often marketed for their investment potential and tax advantages, but a closer examination reveals important considerations. While they can offer certain benefits in specific scenarios, prospective buyers should approach them with careful scrutiny and a full understanding of their complexities.

Potential Advantages

Potential for higher returns: Variable annuities offer the possibility of higher returns based on the performance of the underlying investments.

Tax-deferred growth: Earnings within the annuity grow tax-deferred until withdrawn, potentially increasing the overall return.
Investment flexibility: Annuitants can choose from a variety of investment options, allowing for greater customization of their portfolios.

Though these advantages can appeal to certain investors, their value is often offset by structural limitations and significant costs that deserve close attention.

Key Drawbacks and Cautions

Despite a well-marketed promise of flexibility and growth, variable annuities introduce a range of hurdles that can limit their effectiveness as a retirement solution.

Higher fees: Variable annuities often have higher fees and expenses than other annuity types, which can impact overall returns.

Investment risk: Returns are not guaranteed and depend on the performance of the underlying investments, exposing annuitants to market risk. Investors remain exposed to downside volatility, and high fees may cap the benefits even during strong markets.

Complexity and Opacity: Product features, riders, and contractual fine print make it challenging for even seasoned investors to assess actual value and risk.
Unfavorable tax treatment: Withdrawals are taxed as ordinary income, which may not be as advantageous as capital gains rates available through other investment vehicles.

Shopping for the Best Variable Annuity Rates

When looking for the best variable annuity rates, consider the following factors:

Evaluate the subaccounts: Examine the available investment options within the annuity contract and assess their historical performance, fees, and risk levels. Evaluate the historical performance of the investment subaccounts and their managers.

Compare insurance companies: Research multiple insurance providers to find competitive fees, contract terms, and available investment options.

Assess fees and expenses: Variable annuities often come with various fees, such as management fees, administrative fees, and mortality and expense risk charges. Be sure to understand the total costs associated with the annuity contract.

Consider optional riders: Some variable annuities offer optional riders, such as living benefits or death benefits, for an additional fee. Assess whether these features align with your financial goals.

Check financial ratings: Examine the financial strength and credit ratings of the insurance company offering the annuity to ensure they are reputable and stable.

Best Variable Annuities Rates: Is it a Thing?

Unlike fixed (or even indexed) annuities, variable annuities don’t have any return “rates.” In a variable annuity, the investor contributes money to the annuity, either through a lump-sum payment or a series of periodic payments. The contributions are then invested in a variety of sub-accounts, which are similar to mutual funds. So the entire return or the accumulation is dependent on how these sub-accounts perform. To summarize, the “best” rate varies depending on factors such as:

Investment sub-account selection: The performance of the chosen sub-accounts directly impacts your returns. Selecting a diverse range of high-performing investments can potentially result in higher returns.

Market conditions: Variable annuity returns are subject to market fluctuations, meaning that the "best" rate can change over time as market conditions evolve.

Risk tolerance: The risk level of your chosen investments will also influence your returns. Higher-risk investments may offer the potential for greater returns, but they also come with a greater chance of loss.

Whenever someone asks me about the “best” variable annuity rates, my immediate response is: “But why consider variable annuities at all?”

It’s important to understand that variable annuities tend to carry a long list of fees—management charges, insurance costs, and surrender penalties, to name a few, while still leaving investors exposed to market risk. The value of your annuity is tied to the underlying investments, which means your returns can fluctuate, sometimes significantly.

Take the example of John, who invested in a variable annuity with a 2% annual insurance fee and a 1.5% investment management fee. Over a 20-year period, those ongoing charges could erode John’s returns by more than 30%, even if his investments performed reasonably well. This is a common scenario: high costs can easily outweigh the theoretical benefits of market-linked growth.

For most investors, alternatives like mutual funds, exchange-traded funds (ETFs), index funds, dividend-paying stocks, or real estate investment trusts (REITs) are likely to offer greater flexibility, lower fees, and more transparent structures.

Also, especially for variable annuities, remember that past performance is not indicative of future results, and it is essential to thoroughly research your options before making a decision.

Conclusion

When it comes to variable annuities, there isn’t a definitive “best” rate, as returns depend on the performance of the underlying investment sub-accounts. By carefully selecting sub-accounts, considering fees, and evaluating optional riders, you can customize a variable annuity to align with your financial goals and risk tolerance. It's important to keep in mind that market conditions can impact your returns, so staying informed and making adjustments as needed is crucial. Generally, I do not recommend investing in variable annuities since they often come with higher fees and expenses compared to other retirement savings options, and their returns are subject to market fluctuations, which introduces additional risk.

For those seeking more predictable returns and lower costs, alternative retirement savings vehicles, such as fixed annuities, indexed annuities, or traditional investment accounts, may be a better fit. It’s essential to carefully evaluate your financial goals, risk tolerance, and investment horizon before deciding to invest in a variable annuity.

If you’re unsure about whether a variable annuity is suitable for your retirement strategy, consider consulting with a financial advisor who can provide personalized guidance based on your unique financial situation. By exploring all available options and making informed decisions, you can build a retirement portfolio that meets your needs and provides financial security for your future.