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Variable Life Insurance or Variable Annuity

The first is a type of "whole life" insurance product (also called "permanent life" insurance) for which the policyholder's cash value is invested in one or more portfolios of securities.

The second product is an annuity, for which the consumer invests, through the insurer, in a variety of investment options, typically mutual funds.

Insurance companies issue both products, and anyone who sells them must be registered under state insurance laws and state and federal securities laws.

Although these products provide tax-deferred earnings, you can lose money investing in them. Income and value can move up and down. That's what the "variable" in the name means.

These products also may carry relatively high sales commissions, fees and "surrender charges" if you withdraw money early, typically within the first five to eight years after purchasing the product but sometimes after a longer period.

So, think of variable annuities as long-term investments that can tie up your money for many years. The older you are, the less likely a variable annuity is suitable for you.

Of special concern is that securities and insurance regulators have reported an increase in unsuitable sales of variable products to older investors, who experts say should generally stick to low-risk, low- or no-fee financial products instead of those with potentially high risks and fees.

"Before you invest in a variable life insurance or variable annuity product, be sure that you fully understand how the product works, the risk of loss, and the applicable fees and surrender charges," said Victoria Pawelski, an FDIC Policy Analyst. "Carefully evaluate whether the product is suitable for you given your investment objectives and time frame. And beware of high-pressure sales tactics from sales representatives who may have an incentive to generate high commissions and fees."

More on Variable Annuity

A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.

A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:

First, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Second, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.

Third, variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.

For more information about insurance and annuities, the National Association of Insurance Commissioners has a Web site (www.insureuonline.org) that includes a special alert for seniors on annuities. The NAIC also provides information on how to contact your state insurance regulator to verify that a company and an individual agent are licensed to sell in your state.

For additional guidance about variable annuities and what to consider before buying, the U.S. Securities and Exchange Commission has published investor tips at www.sec.gov/investor/pubs/varannty.htm.

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