Annuities vs. Stocks

For many investors, incorporating a growth engine into their portfolios is essential. Two popular options are variable annuities and common stocks. While both can facilitate wealth accumulation, they have different risk profiles, cost structures and tax exposures.

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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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    Lamia Chowdhury
    Lamia Chowdhury

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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    Rubina K. Hossain, CFP®
    Rubina K. Hossain

    Rubina K. Hossain, CFP®

    Client Advisor for MEIRA

    Certified Financial Planner Rubina K. Hossain is chair of the CFP Board's Council of Examinations and past president of the Financial Planning Association. She specializes in preparing and presenting sound holistic financial plans to ensure her clients achieve their goals.

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  • Updated: August 23, 2023
  • 5 min read time
  • This page features 2 Cited Research Articles
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APA Brock, T. J. (2023, August 23). Annuities vs. Stocks. Retrieved July 17, 2024, from

MLA Brock, Thomas J. "Annuities vs. Stocks.", 23 Aug 2023,

Chicago Brock, Thomas J. "Annuities vs. Stocks." Last modified August 23, 2023.

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Key Takeaways

  • Variable annuities are customizable financial contracts sold by insurance companies. They are comprised of a portfolio of underlying investments.
  • Common stocks are financial securities issued by companies looking to raise money in exchange for a claim on their net assets and future earnings.
  • Both instruments are designed to help investors generate income and grow their wealth over relatively long periods, but they have distinct risk profiles, cost structures and taxation exposures.
  • On a standalone basis, neither investment is appropriate for highly risk-averse investors that lack liquidity and are poorly positioned to endure short-term market fluctuations.

Variable annuities are customizable financial contracts issued by insurance providers. They consist of a portfolio of underlying investments that offer the potential for income and capital appreciation. However, they can exhibit a high degree of volatility.

Common stocks, on the other hand, are financial securities issued by companies looking to raise money to finance operational needs and fuel growth. A share of stock gives an investor fractional ownership in the issuing company and a claim on its net assets and future earnings.

Advantages of Variable Annuities Over Stocks

Most variable annuities have significant exposure to stock markets, which gives them a similar risk profile to common stocks. However, variable annuities usually give investors risk-modifying optionality, whereas stocks do not.

Enhanced Diversification

The best variable annuities offer flexible investment strategies that allow investors to spread their money across multiple asset classes (stocks, bonds, alternative investments, cash, etc). The diversification benefit can result in lower volatility and higher risk-adjusted returns. 


In addition to offering flexible investment strategies, top-notch variable annuities have optional features, known as annuity riders. Essentially, they allow investors to customize their contracts to mitigate specific risk exposures. 

For example, some riders provide protection against the wealth-eroding impact of inflation. Others provide benefit guarantees that guard against the possibility of losing your initial investment. 

The flexibility afforded by riders can be invaluable — financially and emotionally. However, highly customized annuities tend to be very costly and inferior to common stocks and other investments from a net return standpoint.

Tax-Deferred Growth

Perhaps, the most significant advantage of variable annuities versus stocks is the prospect of tax-deferred growth. With nonqualified annuities — those that are purchased with after-tax dollars — annual investment returns are allowed to accumulate free of income tax. No tax is levied until distributions are taken from the annuity, at which point, only investment earnings (not return of principal) are taxed.

The taxation of common stocks is different. Outside of retirement plans, common stock investors must pay tax on all capital gains and dividends in the year of distribution. This diminishes returns and slows the rate at which wealth accumulates.

Disadvantages of Variable Annuities Over Stocks

The relative advantages noted above are compelling, but variable annuities are not without disadvantages. Below, we discuss three prominent drawbacks.

High Costs

Generally, investing in variable annuities is significantly more expensive than investing in common stocks. They have higher commissions, administrative fees and investment management fees, all of which can have a significant return on investment returns. Incidentally, the cost difference gets even bigger when annuity riders are factored into the equation.


After high costs, illiquidity is the most significant drawback associated with variable annuities. Unlike common stocks, they cannot be readily liquidated in a cost-effective manner.

All annuities are subject to surrender charges, if sold within a predetermined time period (usually, six to 10 years). In some cases, surrender charges can be as high as 10%, which makes poorly planned withdrawals extremely punitive.

Tax Treatment for Beneficiaries

A final disadvantage of variable annuities relative to common stocks is the tax treatment for beneficiaries. Common stocks benefit from step-up basis accounting when they change hands. This means any unrealized capital gain embedded in a stock’s value disappears at the point of transfer and is included in the beneficiary’s new stepped-up cost basis.

This is not the case with annuities. The untaxed value embedded in a variable annuity is taxable to a beneficiary.

Are Variable Annuities Right For Me?

Variable annuities can be a prudent investment for a variety of individuals. They make the most sense for people seeking to maximize retirement income while maintaining the ability to grow their investment portfolio throughout their nonworking years. 

They can also make sense for working age individuals looking to grow their savings in a tax-deferred manner. Over long periods of time, the compounding effect can be tremendous.

Regardless of life stage, variable annuities are a good way to diversify your holdings away from traditional financial securities. They can also help you mitigate targeted risks through riders or pass on a death benefit to your heirs. 

That said, variable annuities are not right for everyone. They are a poor choice for highly risk-averse investors that lack liquidity and are poorly positioned to endure short-term market fluctuations.

Good Candidates for Variable Annuities

  • Retirees focused on generating an optimal mix of income and growth
  • Long-term investors seeking tax-deferred growth
  • Prudent investors looking to diversify away from traditional financial securities or guard against specific risks
  • Individuals who want to pass on a legacy

As you think through whether it makes sense to invest in variable annuities or common stocks (or some combination of the two), enlist the help of a fiduciary financial advisor. They can help you assess your options and home in on the most sensible investments given your objectives, tolerance for risk and unique circumstances.

Frequently Asked Questions About Variable Annuities vs. Stocks

Can you lose money on a variable annuity?

Yes, if you sell a variable annuity prior to the expiration of its surrender period, you will incur a substantial surrender charge that can wipeout your cumulative investment returns. Additionally, if your investments perform poorly, you can lose money at any time.

Are variable annuities safer than stocks?

Most variable annuities have significant exposure to stock markets, which gives them a similar risk profile to common stocks. However, variable annuities can be modified to reduce volatility and stabilize returns.

How do variable annuities differ from fixed annuities and indexed annuities?

Variable annuities are the riskiest type of annuity you can buy, given the fact that they entail investment positions in volatile assets, such as stocks and bonds. Fixed annuities are the safest type of annuity because they generate stable, guaranteed rates of interest. Indexed annuities fall somewhere in the middle. Their returns can fluctuate, but most instruments provide downside protection.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 23, 2023

2 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. U.S. Securities Exchange Commission. (2022, September 4). Variable Annuities. Retrieved from
  2. U.S. Securities Exchange Commission. (n.d.). Variable Annuity Charges. Retrieved from