Who assumes the risk in a variable annuity?

In a variable annuity, the policyholder assumes the investment risk. This is a fundamental characteristic that distinguishes variable annuities from fixed annuities. In a variable annuity, the value of the investment can fluctuate based on the performance of the underlying investment options, typically mutual funds. Because the policyholder has the choice to allocate their premiums among various investment options, they bear the market risk, meaning that the ultimate amount of benefits they receive can vary depending on how those investments perform over time.

The investment decisions made by the policyholder, along with market conditions, directly impact the annuity’s value. If the investments perform well, the policyholder may enjoy greater returns and, consequently, a higher income during retirement or at the time of withdrawal. Conversely, if the investments do poorly, the value of the annuity may decrease, leading to reduced benefits.

This contrasts sharply with fixed annuities, where the insurance company bears the investment risk and guarantees a minimum return. The roles of other entities, such as mutual fund managers or government oversight, do not involve assuming the risk associated with the variable returns of the investment; rather, they function within their specific capacities to manage investments or regulate the financial products.