Before we delve into the specific differences between fixed and variable annuities, the article, An Overview of Annuities, looks at how annuities work and their benefits.
Many retirees choose fixed annuities for their predictability, stability and guaranteed stream of income. With a fixed annuity, the life insurance company agrees to pay a fixed rate of income to the investor for life after a certain date.
Moreover, the insurance company assumes the risk of the performance of the annuity's securities by directing the investment of the annuitant's principal into a portfolio of fixed-income investments. When the annuitant decides to begin the payout phase, the amount of income he or she receives is determined by a combination of the account's value and the investor's mortality expectancy.
Take a deeper look into the types of fixed annuities within the article, Exploring Types of Fixed Annuties which also details their advantages and disadvantages.
Variable annuities provide a slightly more complex trade-off to the investor: in return for assuming the performance risk of the underlying securities portfolio, the investor increases his or her potential for higher returns during an accumulation phase.
Unlike a fixed annuity, a variable annuity has no guaranteed returns because the investor's principal is invested in one or more sub-accounts comprised of stocks, bonds and money market instruments. (However, most variable annuities do offer a sub-account that has a fixed rate of interest.) Nevertheless, the investor who wants to stay ahead of the rising cost of living will choose a variable annuity over a fixed one because the fixed annuity will lose its purchasing power over time. We will discuss sub-accounts and other features of variable annuities in the next section.
Exam Tips and Tricks
You will need to know the differences between fixed annuities and variable annuities for the exam.
Features of Variable Annuities
RetirementLearn if buying an annuity makes sense in a low interest rate environment. Also discover the different types of annuities and how interest rates affect them.
RetirementThese investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
RetirementFind out how to get the upper hand when dealing with this payout challenge.
RetirementAnnuities guarantee some degree of fixed income in retirement. But is the security worth the fees and less favorable tax treatment? How to decide.
RetirementLearn more about why annuities are generally purchased and the way that they can positively and negatively affect an individual preparing for retirement.
Financial AdvisorAn in-depth guide to everything you need to know and watch out for with variable annuities.
InvestingAnnuities are attractive because they can give you a stream of income, but they can be tricky to buy.
Financial AdvisorAnnuities suffer from a few perception problems. This primer that covers the good, the bad and the ugly of annuities.
RetirementThese popular investments can provide a steady stream of income during your retirement years. Here are the details.
RetirementFixed, variable and indexed annuities offer different features. Find out which one fits your needs.