What happens to the investment risk in a variable annuity?

In a variable annuity, the investment risk is assumed by the policyholder. This is one of the key features that distinguishes variable annuities from other types, such as fixed annuities. In a variable annuity, the policyholder has the ability to choose from a range of investment options, typically mutual funds, which can include stocks, bonds, and other securities. The performance of these investments directly impacts the value of the policyholder's account and the income generated during retirement.

Because the investments can fluctuate in value based on market performance, the policyholder is exposed to potential gains as well as losses. This means that if the chosen investments perform well, the policyholder may receive a higher payout compared to fixed products. Conversely, if the investments do poorly, the account value may decrease.

In contrast, in fixed annuities, the insurer takes on the investment risk, providing a guaranteed return to the policyholders. This difference emphasizes the variable nature of variable annuities and the active role that policyholders play in managing their investment choices.