A "Variable" annuity is a contract between you and an insurance company. Although it shares many similarities with fixed rate and/or equity-indexed annuities, a variable annuity has three major distinctions from these annuities: risk, fees and often how the death benefits are paid. Setting aside these differences, a variable annuity can look, act and feel much like a more traditional fixed or indexed annuity.
Although issued by insurance companies, variable annuities are not considered solely "insurance products" like fixed annuities. They are considered to be a security, similar to other investments like stocks, bonds or mutual funds, for example. That's because with a variable annuity you can lose principal, unlike with a fixed annuity, which has no investment risk.
When someone initially deposits money into a variable annuity, the funds are allocated to one or more of the annuity's "subaccounts." These subaccounts are chosen by the annuitant from a menu of options that can range from money market accounts to more aggressive growth funds. Although not identical, these offerings frequently emulate popular mutual funds investments.
