How is a variable annuity typically characterized?

A variable annuity is defined by its structure that allows payouts based on the performance of various investment options rather than providing a fixed return. This means that the amounts received in retirement can fluctuate depending on the value of the underlying investments, which can include stocks, bonds, or mutual funds.

In a variable annuity, the value is tied to the performance of investment choices selected by the annuitant. Consequently, the payouts are based on the variable unit values, which change with market conditions, and typically a fixed number of units determined at the time of purchase. This characteristic establishes the connection between the variable nature of the annuity and the potential for higher returns, but also introduces the risk of lower payouts, depending on market performance.

This understanding distinguishes variable annuities from other financial products, such as fixed annuities, that promise guaranteed returns regardless of market conditions or those with guaranteed minimum payouts.