What are its disadvantages?

Variables have several drawbacks that can erode their advantages. For starters, there's a lot more risk associated with a variable annuity.

Investment risk: If the investments you choose for your annuity decline, the value of your annuity will also decline - and that means a lower payout to you.

Taxes: Then there are the taxes. As with fixed annuities, you'll pay taxes on a variable annuity's gains when you withdraw them, plus a 10% penalty if you're under age 59 ½. Variables also have another little tax twist: Any long-term capital gains you build up in stock and bond subaccounts are taxed at ordinary income rates when you withdraw them. This means that high-income investors are effectively converting long-term capital gains taxed into ordinary income that can face far higher rates.

Fees: And then there are variables' fees. Aside from surrender charges that dock you for early withdrawals, variables can also come with steep sales commissions (often 4%). Add ongoing management fees and insurance charges, which combined can run as high as 2% to 3% a year, and you're looking at one hefty load of fees cutting into your returns.

Compare that fee structure with regular no-load mutual funds, which levy no sales commission or surrender charge and impose average annual expenses of less than 0.50% (for index funds) or about 1.5% (actively managed funds).

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.