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. Professionals

    How to Break the Ice with New Clients

    Conducting an effective, initial client–advisor interview is an essential part of any advisor’s job. Here are a few tips on how to get started.
  2. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  3. Professionals

    Why Women Are Underprepared for a Spouse’s Death

    Women are typically less prepared for the death of a spouse than men. An advisor can help mitigate some of the financial burdens widows may end up facing.
  4. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  5. Personal Finance

    Five Things To Avoid at Your Next Interview

    Do you have an interview coming up? Avoid these five mistakes and leave a lasting impression on your potential employer.
  6. Investing News

    Oil Prices Expected to Surge in 2017

    Oil has made headlines for its plummeting prices this year. When will prices rise again?
  7. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  8. Investing Basics

    Investing $100 a Month in Stocks for 30 Years

    Find out how you could potentially earn hundreds of thousands of dollars by just investing $100 a month in stocks during your working years.
  9. Stock Analysis

    Behind Verizon's Decision to Change Its Plan Model

    Take a look at Verizon's new cellphone service plans, and learn about what is behind Verizon's decision to make a major change in its service delivery.
  10. Mutual Funds & ETFs

    Top 5 Health Mutual Funds

    Learn about the top five mutual funds that invest in stocks of companies that primarily operate in the health care sector of the United States.
  1. Unicorn

    In the world of business, a unicorn is a company, usually a start-up ...
  2. Private Equity Real Estate

    A Definition of "Private Equity Real Estate" and how it applies ...
  3. Put-Call Parity

    A principle that defines the relationship between the price of ...
  4. Encumbrance

    A claim against a property by a party that is not the owner. ...
  5. EBITA

    Earnings before interest, taxes and amortization. To calculate ...
  6. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  1. Do mutual funds pay dividends?

    Depending on the specific assets in its portfolio, a mutual fund may generate income for shareholders in the form of capital ... Read Full Answer >>
  2. How can companies use the cash flow statement to mislead investors?

    Cash flow is a means for most investors to examine the actual economics of a business they might invest in, especially from ... Read Full Answer >>
  3. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  4. Does working capital include inventory?

    A company's working capital includes inventory, and increases in inventory make working capital increase. Working capital ... Read Full Answer >>
  5. Does working capital include salaries?

    A company accrues unpaid salaries on its balance sheet as part of accounts payable, which is a current liability account, ... Read Full Answer >>
  6. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!