Premiums go into a separate account invested in subaccounts, so the owner bears the investment risk. Because of that, it is a security as well as an insurance product, and selling it requires both licenses. Growth is tax-deferred; withdrawals come out earnings first and are taxed as ordinary income, with a 10% penalty before 59 1/2. Mortality and expense charges and rider fees make it expensive. Heirs receive no step-up in basis.
Variable Annuity: a worked example
A client exchanging one annuity for another can use a Section 1035 exchange to avoid tax, but may trigger a new surrender charge.
What is the difference between Variable Annuity and Fixed Annuity?
Fixed = insurer bears investment risk, guaranteed rate, not a security. Variable = owner bears risk in subaccounts, is a security.