Fixed vs. Variable Annuity: What’s the Difference?

Shawn Plummer

CEO, The Annuity Expert

Variable Annuity Vs. Fixed Annuity

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Principal ProtectionNoYesYes
Access To PrincipalYesYesYes
Control Over MoneyYesYesYes
Tax-Deferred GrowthYesYesYes
Guaranteed GrowthNoYesYes
Guaranteed IncomeYesYesYes
Inflation ProtectionYesYesNo
Death BenefitYesYesYes
Long-Term Care HelpYesYesYes

Understanding the Basics

Before diving deep, let’s clarify the terms:

  • Fixed Annuity: This is a contract between you and an insurance company where you make a lump sum payment or series of payments. In return, the insurer agrees to make periodic payments to you, either immediately or at some future date. The income you receive is fixed, hence the name “fixed income.”
  • Variable Annuity: Unlike its fixed counterpart, a variable annuity allows you to choose investments. The rate of return on your purchase payments and the amount of periodic payments you will eventually receive will vary depending on the performance of the investments you select, leading to “variable income.

Helpful Tool: fixed and variable annuity calculator

Fixed Vs Variable Annuity

Deferred Variable Annuities vs. Deferred Fixed Annuities

  • Deferred Fixed Annuity: This is a type of fixed annuity where you receive payments at a future date rather than immediately. It’s a way to defer your income, often until retirement, to enjoy tax benefits.
  • Deferred variable annuity: Similarly, this is a variable annuity where the income is deferred to a later date. The amount you’ll receive depends on the performance of your chosen investments.
  • Multi-Year Guaranteed Annuity (MYGA): A subtype of fixed annuities, MYGA offers a guaranteed interest rate for a specific period, often ranging from 3 to 10 years.
  • Fixed Indexed Annuities: These are a solid compromise between fixed and variable annuities. They offer a minimum guaranteed interest rate combined with an interest rate linked to a market index, like the S&P 500.
Fixed Annuity Vs. Variable Annuity

Pros and Cons

Fixed Annuity:

  • Pros: Guaranteed income, simplicity, and security. Ideal for those who want a predictable retirement income.
  • Cons: Might offer lower returns compared to other investments. Limited liquidity.

Variable Annuity:

  • Pros: Potential for higher returns based on market performance. Flexibility in choosing investments.
  • Cons: Returns aren’t guaranteed. Investment risks mean you could receive less than what you’ve paid in.
Variable Annuity Vs. Fixed Annuity

Insightful Analysis

It’s not about which is universally better when comparing “fixed annuity vs. variable annuity” or vice versa. It’s about which is better suited for your financial goals and risk tolerance.

  • If you value stability and don’t want to constantly monitor the market, a fixed annuity might be your best bet. It offers the peace of mind of a fixed income.
  • On the other hand, if you’re looking for potentially higher returns and are comfortable with some level of risk, a variable annuity could be the right choice. Remember, with variable income comes variability in returns.

Next Steps

In the debate of “variable annuity vs. fixed annuity,” understanding your financial goals, risk appetite, and the nuances of each product is crucial. Both have their merits and can serve as valuable tools in your financial arsenal. With the knowledge you’ve gained from this guide, you’re now equipped to make an informed decision that aligns with your future aspirations. Remember, the best investment is one that resonates with your financial journey and peace of mind.

Variable Vs. Fixed Annuity

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Frequently Asked Questions

Is variable or fixed annuity better?

Whether a variable or fixed annuity is better depends on individual preferences and financial goals. Variable annuities offer investment growth potential but carry market risk, while fixed annuities provide stable income but limited growth potential.

Why would someone choose a variable annuity over a fixed annuity?

Someone may choose a variable annuity over a fixed annuity for potentially higher investment returns, flexibility in investment options, and the ability to hedge against inflation through exposure to the stock market.

What is the disadvantage of fixed annuities?

A disadvantage of fixed annuities is that they typically offer lower potential returns compared to variable annuities or other investment options, which may limit long-term growth potential.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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