Variable Contracts - Fixed vs. Variable Annuities


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. We recommend a read if you need a quick primer.


Fixed Annuities
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 Annuities, which also details their advantages and disadvantages.

Variable Annuities
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 made up 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
Related Articles
  1. Home & Auto

    Don't Be the Victim of Auto Loan Rip-Offs

    Subprime auto loans – and 60-day delinquencies – are up. These 4 signs of predatory auto loans can tip you off before you're caught in one.
  2. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  3. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  4. Retirement

    Best Mortgage Companies Friendly to Retirees

    If you’re no longer in the workforce and need a loan to buy a home, which companies are the most welcoming? Plus, good news about qualifying for a loan.
  5. Investing Basics

    Inside IPO Roadshows

    Understand more about IPO road shows. Learn the reasons why an IPO road show is important for the success of a company's public offering.
  6. Investing News

    5 Stocks to Buy Before Oil Rebounds

    Here are five oil related stocks that you might want to own before oil rebounds.
  7. Mutual Funds & ETFs

    5 Vanguard Fixed Income Fund Underperformers

    Learn about three Vanguard fixed income mutual funds that underperform compared to their benchmark indexes. Find out why low expense ratios are important.
  8. Stock Analysis

    JCPenney's Path To Profitability (JCP)

    Learn about what J.C. Penney's management team has been doing to profitably grow its business as the company recovers from years of revenue declines.
  9. Investing News

    Hillary Clinton's Liberal Orthodoxy

    Clinton's economic agenda laid out in July is divided into three broad groups: strong growth, fair growth and long-term growth. And her overarching goal is to "give working families a raise."
  10. Investing News

    Bernie Sanders: Socialist or Liberal?

    Sanders' pitch centers on economic inequality in the U.S., which is both more severe than it is in other developed countries and, if current trends continue, projected to worsen.
RELATED TERMS
  1. Environmental Economics

    An area of economics that studies the economic impact of environmental ...
  2. Fair Trade Price

    A minimum price paid for certain agricultural products imported ...
  3. FANG Stocks (FB, AMZN)

    FANGs stands for the high-performing tech stocks Facebook, Amazon, ...
  4. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  5. Great Society

    Born in the turbulent sixties, the Great Society was President ...
  6. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  4. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  5. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  6. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center