Variable annuities are essentially mutual funds wrapped in an insurance package. When you buy a variable annuity, you can direct your investments into a range of stock or bond portfolios, called subaccounts, made available within a particular policy.

Why choose a variable annuity (VA) policy over mutual funds or stocks? VAs have two selling points.

First is the death benefit, or insurance that when you die your heirs will receive the greater of your initial investment or the account's current value. In other words, if the account is worth less when you die than when you initially invested in it, your heirs will get what you invested. That won't happen with a mutual fund or a basket of stocks.

Second, your contributions grow tax-deferred until retirement. You can elect to take your gains in a lump-sum distribution, or you can choose to receive annuitized payments in retirement. In other words, the money invested in the VA is systematically returned as a guaranteed income stream.

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