Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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What type of investments are excluded from a variable annuity?

In short, the insurance company reserves the right to exclude any risky investments in an annuity contract. Commonly excluded investments include life insurance contracts and collectibles.

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Let’s first consider what is involved in a variable annuity contract, and how investment relates to income. An annuity contract is a contract that guarantees income to the insured after a specific date passes.

This is a commonly sought out plan by retired Americans looking for low risk investments. These individuals want to ensure income after they retire, and so purchase annuity contracts, payable by a lump sum or by regular monthly payments.

There are two phases of an annuity. The accumulation phase is when the investor pays and the earnings build. The distribution phase is when money is withdrawn. The way both are handled depend on the type of annuity contract purchased.

Variable Annuity Contracts

Both variable and fixed annuity contracts are available. Whereas the fixed contract guarantees a certain amount of payment to the insured, the variable contract payment can change on a month to month basis.

While many companies do offer caps on profit loss, for the most part, the actual figure is determined by investment performances. Variable annuities are similar to ordinary mutual funds except in the fact that they:

One of the potential disadvantages of a variable annuity plan is that the return is not stable. In fact, the amount will be determined by the investments and the turn of the stock market. These investments will increase or decrease depending on the performance of various subaccounts associated with the contract. Market fluctuation plays a big part in determining the income rate.

Unfortunately, for some annuity insurance products, it is possible that investors will fail to earn interest or worse yet, lose the money they pay in the accumulation phase.

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Types of Investments

Naturally, you would be wise to consider what types of investments based on the level of risk and reward they offer. This brings us to an important issue: what types of investments are usually involved in variable annuity contracts?

There are three general types of investments included in these subaccounts. They include:

  • Mutual funds (including stocks, bonds, small venture and international holdings)
  • Fixed buckets (a more conservative structure including a minimum guarantee)
  • Money market sweeps

Equity mutual funds are another type of less common investment choice. Keep in mind that that while some accounts may only have a dozen or so investment strategies, others have literally hundreds.

The true value of this sort of contract is determined by the value of the investment portfolios that go along with the annuity. You as the owner must bear the risk for these values, whether the value increases or decreases due to recent performances. The insurance company decides what types of investments are excluded from a variable annuity contract.

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Banned Investment Types

Another interesting fact is that there are actually many more investments allowable in an annuity contract than you might think. While we have been taught that stocks, bonds and mutual funds are the only options available, this is not entirely true. There are many more options that could be included and, with recent legislative changes passed, it is now a requirement for insurance providers to clearly list investment objectives along with the contract.

The only two types of investments regularly excluded by insurance companies include life insurance contracts and collectibles, such as art and jewelry. You must also keep in mind that variable annuities have associated fees. These fees can sometimes affect the performance of the annuity.

Remember, you will typically have the option to transfer funds between your portfolios. Therefore, if you see the need to protect your investment, by all means inquire to your insurance agency. Understanding how variable annuities work can be difficult. However, it’s just a matter of analyzing the individual subaccounts and determining what investments are worth keeping for the long run. Don’t hesitate to ask a trusted financial advisor for help wading through your many annuity options.

You can start looking for annuity contracts right now! Whether you are interested in a fixed annuity contract or a variable annuity contract, you can find more information by searching insurance companies online.

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