What Is an Investment-Only Variable Annuity (IOVA)?

For investors who want the tax advantages of an annuity without the high fees or restrictive features, an investment-only variable annuity (IOVA) offers a compelling alternative. Unlike traditional annuities that emphasize income guarantees, IOVAs focus purely on investment growth and flexibility, allowing you to build wealth on your own terms. With access to a wide range of funds and the benefit of tax-deferred compounding, they’re becoming an increasingly popular choice among high-net-worth and self-directed investors looking to maximize long-term returns while maintaining control.

If you’re considering an IOVA, talk to a financial advisor about whether one aligns with your goals.

How an Investment-Only Variable Annuity Works

An investment-only variable annuity (IOVA) functions much like a traditional variable annuity but with a simplified structure focused primarily on investment growth rather than income guarantees. Instead of bundling insurance features like death benefits or lifetime income riders, an IOVA allows investors to allocate funds among a wide range of professionally managed subaccounts. This stripped-down design offers greater flexibility and transparency, often at a lower cost.

These annuities offer a wide range of investment options, such as stocks, bonds and mutual funds, allowing policyholders to create a diversified portfolio suited to their financial goals.

How IOVAs Are Taxed

Like other annuities, earnings within an IOVA grow tax-deferred until withdrawals are made. When you withdraw funds from your IOVA – whether as periodic payments or a lump sum, the gains are subject to ordinary income tax rates. This can be advantageous for individuals who expect to be in a lower tax bracket during retirement.

For example, if an investor’s tax rate falls from 32% to 24% when they retire, they’d end up paying fewer taxes on their IOVA withdrawals. Similar to many retirement accounts, there’s a 10% penalty on withdrawals made before age 59½. However, there are exceptions to this penalty, such as disability or death.

Costs of an IOVA

There are a variety of fees associated with IOVAs, which can impact your returns. Here’s a look at four common charges and fees you could pay for an IOVA:

Mortality and expense (M&E) fees: IOVAs typically charge M&E fees to cover the insurance aspect of the annuity. These fees can eat into your investment gains.

Administrative fees: To manage your account and transactions, IOVAs impose administrative fees. These can vary among providers.

Subaccount fees: IOVAs allow you to invest in subaccounts similar to mutual funds. Each subaccount may have its own management fees.

Surrender charges: If you withdraw your funds before a specified period, you may face surrender charges. These can be steep if you withdraw early.

Benefits of Investment-Only Variable Annuities

A middle-aged couple reviews their retirement plan as they consider purchasing an investment-only variable annuity (IOVA)

These unique financial instruments offer several compelling benefits, especially for savers who max out their retirement account contributions and want to save even more on a tax-deferred basis. Here are four common benefits to consider:

Tax-deferred growth: One of the primary advantages of IOVAs is their tax-deferred status. While your investments grow within the annuity, you won’t have to pay taxes on the gains until you withdraw the funds. This can provide a significant advantage, allowing your investments to potentially grow faster over time.

Diverse investment options: IOVAs offer a wide range of investment options. This flexibility allows investors to tailor their portfolios to align with their risk tolerance and financial goals.

Creditor protection: In many cases, IOVAs offer protection from creditors. This means that even in challenging financial situations, your investments held within the annuity may be shielded from potential legal claims.

Guaranteed minimum death benefit: Some IOVAs come with a guaranteed minimum death benefit, ensuring that your heirs receive at least the amount you initially invested, even if market fluctuations have reduced the account’s value. Since annuities bypass the lengthy and costly probate process, IOVAs can allow for a seamless transfer of assets to beneficiaries.

Drawbacks of IOVAs

Alongside these benefits, IOVAs carry certain risks and disadvantages. It’s important to understand the potential drawbacks as your consider investing in an IOVA. Here are five common ones:

Complexity: IOVAs can be difficult to understand, with intricate fee structures, subaccounts and investment options. Investors may find it challenging to grasp the full scope of these products, potentially leading to costly mistakes.

Fees: As described above, IOVAs often come with a range of fees, including management, mortality and administrative expenses. These charges can eat into your returns and reduce the overall profitability of your investment.

Lack of liquidity: IOVAs are long-term investments and accessing your funds can be restricted. Surrender charges, which can be substantial, may apply if you need to withdraw your money prematurely.

Market risk: Since these annuities are tied to the performance of subaccounts invested in the market, they are susceptible to market fluctuations. This means that while there is potential for significant gains, there’s also the risk of substantial losses.

Tax implications: While IOVAs offer tax-deferral benefits, withdrawals are generally taxed as ordinary income, potentially subjecting investors to higher tax rates.

What the “Free Look” Period Means for IOVAs

A young couple that recently purchased an investment-only variable annuity (IOVA) reviews their decision during the free look period.

When you purchase an investment-only variable annuity (IOVA), you’re entitled to what’s known as a “free look” period, a short window of time that allows you to review your contract and decide if you want to keep it. This period typically lasts between 10 and 30 days, depending on your state’s regulations. During this time, you can cancel the annuity for any reason and receive a full refund of your initial investment, giving you a chance to reconsider your decision without financial penalty.

The free look period is designed to protect investors, especially given the complexity of annuity contracts. It gives you time to carefully read through the terms, understand the fee structure and ensure that the IOVA truly aligns with your goals and risk tolerance. Because these products often have long-term implications and tax consequences, using this period to ask questions or seek professional advice can help you avoid costly mistakes later on.

If you decide that the annuity isn’t the right fit, you can cancel it during the free look period by submitting a written request to the issuing insurance company. Once canceled, you’ll typically receive a full refund of your premium, though the exact process and timeline can vary by provider. Even if you’re confident in your decision, it’s wise to treat the free look period as a final checkpoint, an opportunity to confirm that your investment aligns with your broader financial strategy and long-term retirement goals.

Bottom Line

An investment-only variable annuity (IOVA) can be a powerful tool for investors seeking tax-deferred growth, broad investment choices and lower fees compared to traditional annuities. By removing costly insurance features, it offers greater flexibility and control for those focused on long-term wealth building rather than guaranteed income.

Retirement Planning Tips

Retirement planning can be complicated but a financial advisor can guide you through the process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
f you’re unsure how much you need to save to afford retirement, give SmartAsset’s retirement calculator a try. The free tool will estimate how much you need to have to meet your expenses in retirement and whether you’re on track.