What is a variable annuity?

A variable annuity is an insurance contract whose investment returns depend on the performance of underlying sub-accounts (similar to mutual funds) you select. Unlike fixed annuities (guaranteed rate) or fixed-indexed annuities (index-linked with caps), variable annuity returns can be high or low — including negative — based on market performance.

What fees do variable annuities charge?

Variable annuities typically have three fee layers: (1) underlying fund expense ratios (0.5-2%), (2) Mortality & Expense (M&E) charges (1-1.5%) covering the insurance company's guarantees and overhead, and (3) administrative fees (0.1-0.3%). Optional riders add 0.5-1.5% each. Total fees often reach 2.5-4% per year — far higher than direct investing in equivalent mutual funds.

Are variable annuities a good investment?

For most investors, no — the high fees significantly drag returns over long horizons. Variable annuities can make sense for high-income investors who: (1) have maxed all tax-advantaged accounts (401(k), IRA, HSA), (2) specifically need certain insurance features (guaranteed lifetime income, enhanced death benefits), and (3) have substantial other assets for liquidity. For typical investors, low-cost index funds in Roth or Traditional IRAs are dramatically better.

Can I exchange one variable annuity for another?

Yes, via a 1035 exchange (IRS Section 1035). This lets you swap one annuity contract for another without triggering income tax on any accumulated gain. Useful for moving from high-fee products to lower-fee alternatives if you're stuck in a poor existing annuity. Watch for surrender charges on the existing contract — they still apply during the surrender period.

What about the step-up in basis at death?

Variable annuity assets do NOT receive a step-up in basis at the owner's death. Beneficiaries inherit the original cost basis and owe ordinary income tax on all deferred gains upon withdrawal. By contrast, taxable brokerage accounts DO receive step-up at death — heirs inherit at current value with no tax on prior appreciation. This is a major estate planning disadvantage of variable annuities, particularly for high-net-worth families.

Variable Annuity Growth Projector

Estimate how a variable annuity investment grows over time after accounting for all fees. Compare gross returns with net returns after expense ratios, mortality and expense charges, and administrative fees.

Last updated: May 26, 2026Reviewed by the CalcMountain editorial team

About this calculator

A variable annuity is an insurance contract whose investment performance varies based on the underlying sub-accounts (similar to mutual funds) you choose. Unlike fixed annuities (which pay a guaranteed rate) or fixed-indexed annuities (which pay returns linked to a market index with caps), variable annuities expose you directly to market performance. Investment options typically include stock funds, bond funds, and money market sub-accounts. Returns can be high or low — including negative — depending on market conditions and your fund choices.

What makes variable annuities controversial is the fee structure. Layered on top of the underlying fund expense ratios (typically 0.5–2%) are insurance company charges: the Mortality & Expense (M&E) charge (typically 1–1.5%) and administrative fees (typically 0.1–0.3%). Optional living benefit riders add another 0.5–1.5%. Total annual fees of 2.5–4% are not unusual — far higher than direct investment in equivalent mutual funds (often 0.05–0.50%). The fees compound against returns, dramatically reducing net wealth accumulation over long horizons.

This calculator projects variable annuity growth net of all fee layers. Compare the gross return potential against the net result after fees to see the impact. For most investors who haven't maxed out tax-advantaged accounts (401(k), IRA, HSA), those accounts are usually superior to variable annuities — they offer the same tax deferral with dramatically lower fees. Variable annuities mainly suit high-income investors who have maxed all other tax-deferred options and specifically value certain insurance features (guaranteed income riders, death benefits, principal protection) that the calculator doesn't price.

Formula

Total annual fees: Total Fees = Expense Ratio + Mortality & Expense Charge + Admin Fee Net annual return: Net Return = Expected Return − Total Fees Growth calculation (year-by-year): Each year: Balance(t) = (Balance(t-1) + Annual Contribution) × (1 + Net Return) Future value with growth and ongoing contributions: FV ≈ P × (1 + r_net)^n + C × [(1 + r_net)^n − 1] / r_net Where: P = Initial investment C = Annual contribution r_net = Net annual return n = Years Fee impact comparison: Gross FV (no fees): same formula with r = Expected Return Net FV (with fees): formula with r = Net Return Lifetime fee cost: Gross FV − Net FV Example: $100,000 initial, $5,000/year contribution, 7% expected return, 20 years, 0.8% expense ratio + 1.25% M&E + 0.15% admin = 2.2% total fees. Net return: 7% − 2.2% = 4.8% Net FV: $100,000 × 1.048^20 + $5,000 × [(1.048^20 − 1)/0.048] ≈ $256,400 + $164,400 ≈ $420,800 Gross FV (no fees, 7% return): $100,000 × 1.07^20 + $5,000 × [(1.07^20 − 1)/0.07] ≈ $386,970 + $205,000 ≈ $591,970 Lifetime fee cost: $591,970 − $420,800 = $171,170 The 2.2% in annual fees cost $171,170 over 20 years — nearly equal to the original principal. By comparison, a low-cost index fund equivalent (0.05% expense ratio) would have cost roughly $5,000 total in fees over the same period — saving $166,000.

How to use this calculator

Enter the initial investment (lump sum).
Enter the annual contribution. Many variable annuities allow ongoing contributions; some require lump sum only.
Enter the expected annual return on the underlying sub-accounts (gross of fees). Use 6-8% for diversified equity allocations; 4-6% for moderate; 3-5% for conservative.
Set the investment period in years. Variable annuities are long-term products — surrender charges typically apply for 7-10+ years.
Enter the underlying fund expense ratio. Variable annuity sub-accounts often have higher expense ratios than equivalent retail mutual funds (typically 0.5-2% vs 0.05-0.5% for index funds).
Enter the Mortality & Expense charge — the insurance company's fee for guarantees and longevity-related provisions. Typical range: 1.0-1.5%.
Enter administrative fees. Typical: 0.1-0.3%.
Add optional rider costs if applicable (guaranteed minimum withdrawal benefit, guaranteed minimum income benefit, enhanced death benefit). Riders add 0.5-1.5% to total annual fees.
Review the net result after fees. Compare to: what the same money would grow to in a low-cost retail mutual fund or ETF in a Roth/Traditional IRA at similar expected return but with 0.05-0.5% total expense ratio.
For most investors, the comparison favors low-cost tax-advantaged accounts. Variable annuities make sense only when those are maxed AND specific insurance features are needed.

Worked examples

Standard variable annuity — meaningful fee drag

$200,000 initial. No additional contributions. 8% expected return. 25 years. Total fees: 2.5% (0.9% expense ratio + 1.4% M&E + 0.2% admin). Net return: 5.5% Net FV after 25 years: $200,000 × 1.055^25 ≈ $762,800 Gross FV (no fees): $200,000 × 1.08^25 ≈ $1,369,500 Fee cost: $606,700 over 25 years. The 2.5% annual fee turned what would have been a $1.4M outcome into $762K — losing nearly half the wealth growth to fees. For comparison, the same $200K invested in a Roth IRA-held S&P 500 index fund (0.04% expense ratio): net return 7.96%, final value ≈ $1,360,200. The Roth IRA outcome is nearly DOUBLE the variable annuity.

High-income investor — variable annuity may make sense

$500,000 initial. $30,000 annual contributions for 15 years. 8% expected return. Already maxed 401(k), IRA, HSA. Investor is in 37% top federal bracket plus 13% state. Without variable annuity, the alternative is a taxable brokerage account. Even with tax-efficient index funds, dividends and rebalancing trigger annual tax drag estimated at 1.5% in this high-bracket scenario. Variable annuity (2.2% total fees, 8% gross return): Net return: 5.8% Year 15 value: ≈ $1,840,000 (tax-deferred — full amount remains until withdrawal) Taxable account (8% gross, ~1.5% annual tax drag): Net return: 6.5% Year 15 value: ≈ $1,876,000 (but ~$420,000 owed in deferred capital gains tax) After-tax value: ≈ $1,664,000 Variable annuity moderately wins on after-tax basis for high-bracket investor with maxed alternatives. Even so, the math is close — fees nearly offset the tax-deferral benefit.

Comparing with riders

Same scenario as the standard example, but with a Guaranteed Minimum Withdrawal Benefit (GMWB) rider adding 1.2% to fees. Total fees: 3.7% (2.5% base + 1.2% rider) Net return: 4.3% Net FV after 25 years: ≈ $576,500 (vs $762K without rider) The rider cost $186,300 in lifetime growth — paying for the guarantee that you can withdraw a minimum amount (typically 5% of original principal) for life regardless of market performance. If the guarantee provides specific value (longevity insurance during withdrawals, protection during major market drops), it can be worth the cost. For most investors, the implicit cost (lost growth) exceeds the value of the guarantee.

When to use this calculator

Use this calculator when evaluating a variable annuity offer, comparing variable annuity proposals from different insurers, or considering whether to exchange an existing variable annuity for a different product.

Variable annuities make sense for: high-income investors who have maxed all tax-advantaged accounts (401(k), IRA, Roth IRA, HSA) and want additional tax-deferred growth, investors who specifically value guaranteed lifetime income riders or enhanced death benefits, and certain estate planning scenarios where the annuity's death benefit serves a specific purpose.

Variable annuities are typically wrong for: investors who haven't maxed tax-advantaged accounts first, anyone who would benefit equally from a low-cost taxable brokerage account, investors prioritizing maximum long-term wealth accumulation (the fees significantly drag returns), and most retirees who could meet income needs with cheaper alternatives (CDs, bond funds, immediate annuities without the variable component).

Pair this with the fixed-annuity calculator (simpler annuity product), the mutual-fund-expense calculator (to compare against direct fund investing), the 401(k), IRA, and Roth-vs-Traditional calculators (to confirm tax-advantaged accounts are maxed first), and the lump-sum-vs-annuity calculator if you're considering converting accumulated value to income annuity payments.

A few critical considerations specific to variable annuities:

1. **Surrender charges.** Most variable annuities have surrender charge schedules of 5–10% in year 1, declining over 7–10 years. Don't put money in a variable annuity that might be needed before the surrender period ends.

2. **Tax treatment.** Variable annuity withdrawals are taxed as ordinary income (not long-term capital gains). For pre-59½ withdrawals, an additional 10% IRS penalty applies. This is a tax DISADVANTAGE vs. taxable brokerage for long-term equity holdings (which qualify for LTCG rates at 0%/15%/20%).

3. **No step-up at death.** Variable annuity assets do not receive a step-up in basis at the original owner's death. Beneficiaries inherit the original cost basis and owe ordinary income tax on all deferred gains upon withdrawal. Taxable brokerage accounts DO receive step-up at death, which can be enormously valuable for estate planning.

4. **1035 exchanges.** If you're unhappy with an existing variable annuity, IRS Section 1035 allows you to exchange it for another annuity contract without triggering tax. This lets you move from high-fee products to lower-fee alternatives without tax consequence.

5. **Be wary of high-commission sellers.** Variable annuities often pay commissions of 5-7% of the contract value to the salesperson. This creates a strong incentive to sell the product regardless of suitability. Independent fee-only advisors with no annuity commissions provide more objective guidance.

Common mistakes to avoid

Buying variable annuities before maxing tax-advantaged accounts. The tax-deferral benefit of a variable annuity overlaps with 401(k), IRA, Roth IRA, and HSA — but those alternatives have 90-99% lower fees. Always max tax-advantaged accounts first.
Ignoring the fee drag. 2-3% in annual fees doesn't sound large but compounds into 30-50% of ending balance over 20-30 years. The fee math is unforgiving.
Over-buying riders. Living benefit riders sound attractive (guaranteed minimum income, principal protection) but cost 0.5-1.5% per year. Evaluate each rider's value carefully against its cost.
Surrendering inside the surrender period. Surrender charges of 5-10% in early years make exiting an expensive mistake. Plan for the full surrender period or don't buy.
Forgetting variable annuity withdrawals are taxed as ordinary income. For taxable accounts holding long-term equity investments, capital gains rates (0/15/20%) apply. Variable annuity withdrawals are taxed at ordinary income rates (up to 37%). This is a meaningful disadvantage for high-bracket investors comparing to taxable brokerage.
Trusting the seller's "back of envelope" projections. Variable annuity illustrations often show gross returns at unrealistic levels and exclude some fees. Always run your own calculations with realistic assumptions including ALL fee layers.

Frequently Asked Questions

Sources & further reading

Variable Annuities — What You Should Know — U.S. Securities and Exchange Commission
Variable Annuities — Investor Bulletin — U.S. Securities and Exchange Commission
Annuities — overview and consumer guidance — National Association of Insurance Commissioners

Variable Annuity Growth Projector

Inputs

Initial Investment

Annual Contribution

Expected Annual Return

Investment Period (Years)

Fund Expense Ratio

Underlying fund expenses

Mortality & Expense Charge

Insurance company charge

Admin Fee

Results

Future Value

$417,281

Total Contributions

$200,000

Total Fees Paid

$99,587

Effective Annual Return

7.40%

Year-by-Year Breakdown

Year	Start Balance	Contribution	Gross Return	Fees	End Balance
1	$100,000.00	$5,000.00	$7,000.00	$2,200.00	$109,800.00
2	$109,800.00	$5,000.00	$7,686.00	$2,415.60	$120,070.40
3	$120,070.40	$5,000.00	$8,404.93	$2,641.55	$130,833.78
4	$130,833.78	$5,000.00	$9,158.36	$2,878.34	$142,113.80
5	$142,113.80	$5,000.00	$9,947.97	$3,126.50	$153,935.26
6	$153,935.26	$5,000.00	$10,775.47	$3,386.58	$166,324.16
7	$166,324.16	$5,000.00	$11,642.69	$3,659.13	$179,307.72
8	$179,307.72	$5,000.00	$12,551.54	$3,944.77	$192,914.49
9	$192,914.49	$5,000.00	$13,504.01	$4,244.12	$207,174.38
10	$207,174.38	$5,000.00	$14,502.21	$4,557.84	$222,118.75
11	$222,118.75	$5,000.00	$15,548.31	$4,886.61	$237,780.45
12	$237,780.45	$5,000.00	$16,644.63	$5,231.17	$254,193.91

Last updated: May 26, 2026Reviewed by the CalcMountain editorial team

About this calculator

Formula

How to use this calculator

Enter the initial investment (lump sum).
Enter the annual contribution. Many variable annuities allow ongoing contributions; some require lump sum only.
Enter the expected annual return on the underlying sub-accounts (gross of fees). Use 6-8% for diversified equity allocations; 4-6% for moderate; 3-5% for conservative.
Set the investment period in years. Variable annuities are long-term products — surrender charges typically apply for 7-10+ years.
Enter the underlying fund expense ratio. Variable annuity sub-accounts often have higher expense ratios than equivalent retail mutual funds (typically 0.5-2% vs 0.05-0.5% for index funds).
Enter the Mortality & Expense charge — the insurance company's fee for guarantees and longevity-related provisions. Typical range: 1.0-1.5%.
Enter administrative fees. Typical: 0.1-0.3%.
Add optional rider costs if applicable (guaranteed minimum withdrawal benefit, guaranteed minimum income benefit, enhanced death benefit). Riders add 0.5-1.5% to total annual fees.
Review the net result after fees. Compare to: what the same money would grow to in a low-cost retail mutual fund or ETF in a Roth/Traditional IRA at similar expected return but with 0.05-0.5% total expense ratio.
For most investors, the comparison favors low-cost tax-advantaged accounts. Variable annuities make sense only when those are maxed AND specific insurance features are needed.

Worked examples

Standard variable annuity — meaningful fee drag

High-income investor — variable annuity may make sense

Comparing with riders

When to use this calculator

A few critical considerations specific to variable annuities:

Common mistakes to avoid

Buying variable annuities before maxing tax-advantaged accounts. The tax-deferral benefit of a variable annuity overlaps with 401(k), IRA, Roth IRA, and HSA — but those alternatives have 90-99% lower fees. Always max tax-advantaged accounts first.
Ignoring the fee drag. 2-3% in annual fees doesn't sound large but compounds into 30-50% of ending balance over 20-30 years. The fee math is unforgiving.
Over-buying riders. Living benefit riders sound attractive (guaranteed minimum income, principal protection) but cost 0.5-1.5% per year. Evaluate each rider's value carefully against its cost.
Surrendering inside the surrender period. Surrender charges of 5-10% in early years make exiting an expensive mistake. Plan for the full surrender period or don't buy.
Forgetting variable annuity withdrawals are taxed as ordinary income. For taxable accounts holding long-term equity investments, capital gains rates (0/15/20%) apply. Variable annuity withdrawals are taxed at ordinary income rates (up to 37%). This is a meaningful disadvantage for high-bracket investors comparing to taxable brokerage.
Trusting the seller's "back of envelope" projections. Variable annuity illustrations often show gross returns at unrealistic levels and exclude some fees. Always run your own calculations with realistic assumptions including ALL fee layers.

Frequently Asked Questions

Sources & further reading

Variable Annuities — What You Should Know — U.S. Securities and Exchange Commission
Variable Annuities — Investor Bulletin — U.S. Securities and Exchange Commission
Annuities — overview and consumer guidance — National Association of Insurance Commissioners

About this calculator

Formula

How to use this calculator

Worked examples

Standard variable annuity — meaningful fee drag

High-income investor — variable annuity may make sense

Comparing with riders

When to use this calculator

Common mistakes to avoid

Frequently Asked Questions

What is a variable annuity?

What fees do variable annuities charge?

Are variable annuities a good investment?

Can I exchange one variable annuity for another?

What about the step-up in basis at death?

Sources & further reading

Related Calculators

Fixed Annuity Payout Calculator

Investment Returns Calculator

Life Insurance Calculator (DIME Method)

Life Insurance Needs Calculator

Disability Insurance Calculator

Long-Term Care Cost Estimator

Inputs

Results

Year-by-Year Breakdown

About this calculator

Formula

How to use this calculator

Worked examples

Standard variable annuity — meaningful fee drag

High-income investor — variable annuity may make sense

Comparing with riders

When to use this calculator

Common mistakes to avoid

Frequently Asked Questions

What is a variable annuity?

What fees do variable annuities charge?

Are variable annuities a good investment?

Can I exchange one variable annuity for another?

What about the step-up in basis at death?

Sources & further reading

Related Calculators

Fixed Annuity Payout Calculator

Investment Returns Calculator

Life Insurance Calculator (DIME Method)

Life Insurance Needs Calculator

Disability Insurance Calculator

Long-Term Care Cost Estimator

Inputs

Results

Year-by-Year Breakdown