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

Shawn Plummer

CEO, The Annuity Expert

Annuities are financial products that offer a guaranteed income for life. They have many benefits, but they also have some drawbacks. In this post, we will focus on the differences between variable annuities and fixed annuities. Variable annuity rates can change based on market performance, which is something to consider when deciding what type of annuity to purchase. On the other hand, fixed annuities typically provide more security because they do not fluctuate with the market value of your investment portfolio. However, there are fees associated with them and tax implications upon withdrawal if you decide to take out money before age 59 ½ years old. We hope this guide helps answer any questions about these two types of annuities!

How Do Annuities Work?

Annuities are insurance contracts that guarantee regular income payments immediately or in the future in exchange for payment(s) now. Most annuities help prevent you from outliving your savings by “insuring” that you’ll receive a certain amount in regular payments for a fixed period of time or the rest of your life.

The time when you put money in an annuity is called the accumulation phase. You can add money gradually or in one big payment. When you start to take out money from your annuity, this is called the distribution phase.

When you open an annuity, you must choose when your payments will start and how long they will last. The insurance company that provides the annuity calculates the value of your monthly payments based on how much money you’ve saved, the time before starting the income, and how long you want them to last.

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What Is a Variable Annuity?

A variable annuity is a fixed-income investment that fluctuates in value depending on the performance of financial markets such as the stock market.

A variable annuity is a retirement savings accounts that offer tax-deferred growth for your investment. When you start receiving payments, you pay ordinary income taxes. Variable annuities are notable because they let you make unlimited annual contributions to a tax-advantaged account. They might also include appealing add-on features that traditional retirement accounts don’t have, such as death benefits and guaranteed lifetime withdrawal benefits.

Variable annuities are similar to fixed annuities in that they may be purchased as either a:

Variable Annuity Rates

A variable annuity’s rate of return is determined by the performance of the investments in its portfolio. Variable annuities generally provide a variety of subaccounts, which function like mutual funds and offer a combination of component investments.

Benefits of Variable Annuities

You might want to get a variable annuity because it offers certain benefits that include:

  • No Contributions Limits: You might want to get a variable annuity if you have maxed out your retirement plans at work and in an IRA. This will allow you to save even more money for retirement without losing any of the benefits you would get from saving in these other places.
  • Plenty of Upside Potential: Variable annuities let you accumulate wealth faster in the future. The more money you put in, the more income comes out.
  • An Income For Life: Investors can receive a guaranteed stream of income for life. Variable annuities allow investors to extend their growing cash reserves over their entire lives.
  • A Death Benefit For Beneficiaries: If you die before your contract’s distribution phase, your survivors may get a payout. If you buy this type of rider, then the company will give them their money. And there is no waiting for slow courts to distribute the funds to them.

Disadvantages to Variable Annuities

There are several advantages to investing in a variable annuity, but there are also disadvantages.

  • High Fees: Annual fees for variable annuities range between 3 and 4 percent of the contract value.
  • Unpredictable Returns and Potential Losses: A stock market downturn might reveal that your portfolio does not earn as much as you had anticipated, and its value may be jeopardized.
  • Surrender Charges: If you need to withdraw funds above your allotted amount from your annuity before the expiration date specified in your contract, you may be hit with substantial penalties called surrender charges.
  • Tax Penalties: An IRS 10% early withdrawal penalty may apply if you withdraw money before you reach age 59 1/2.

What Is A Fixed Annuity?

A fixed annuity is a type of guaranteed return investment that promises a certain amount each year, similar to a Certificate of Deposit at a bank. Fixed annuities are considered less risky than variable annuities and offer investors the opportunity to protect their money while still receiving payment from their retirement savings.

Fixed Annuity Rates

Unlike a variable annuity, where your rate of return is linked to the stock market, fixed annuities provide a set rate of return for the duration of the agreement.

Fixed Annuity Benefits

Fixed annuities offer several benefits that include:

Guaranteed rate of return: You’ll be protected from stock market volatility while still achieving a reasonable rate of return on your investment. Deposit rates at a bank will be much lower than a fixed annuity.

Easy To Understand: Fixed annuities are generally more straightforward for investors to comprehend and avoid unpleasant surprises after purchase since they have fewer moving components.

Budgeting Your Future Income, Today: Because you know the actual annuity payout amounts you will receive throughout the contract’s life, you can plan for your retirement more accurately.

Fixed Annuity Disadvantages

Fixed annuities, while offering a guaranteed rate of return and basic protection against principal loss, do have certain flaws.

  • Lower Returns: Fixed annuities generally have higher rates than comparable long-term investments, such as certificates of deposits (CDs), but they are typically a fraction of stock market returns. And because you’re locked into a fixed annuity contract, you won’t be able to take advantage of future interest rate hikes.
  • Inability To Keep Up With Inflation: Rates of return indicate that your investment will not keep up with inflation. Riders are available to help you find the solution that best fits your needs and budget, but costs may negate any benefits. If you request a COLA rider, you will receive lower initial distributions than if you did not get one.
  • Possible Fees: Variable annuities come with more riders and higher fees, but riders like long-term care, lifetime income, and death benefits for your heirs can quickly raise your fixed annuity annual management costs.
  • Surrender Charges: You’ll be hit with penalties if you need to withdraw your money before the end of the surrender term. These might be as high as 9 percent.
  • Tax Penalties: If you’re under age 59.5, you’ll face an additional 10% penalty from the IRS.

Fixed Annuities

Shop and compare the latest fixed annuity products, then request a quote.

Fixed vs. Variable Annuity

Variable annuities and fixed annuities have advantages and drawbacks. In certain situations, one may be more appropriate than the other.

Variable Annuity

Variable annuities might be the answer for individuals who are ready to take a chance on their retirement funds—or those who want to save a lot for retirement.

For people who wish to invest in stock-like markets but need guaranteed income, living benefit, or death benefit linked to their annuity to help them achieve their financial objectives, variable annuities might be a good option.

Fixed Annuity

If you do not want the risk, a fixed annuity is a better option.

If you want to earn more interest than a CD but don’t want to take on the risk, a guaranteed investment contract called a fixed indexed annuity might be a better option.

When deciding between these types of annuities, focus on your risk tolerance and what blanks you need to fill in your retirement plan.

General Accounts and Separate Accounts

The cash value of a variable annuity is calculated based on the performance of the variable subaccounts in the insurance’s separate account to which premiums have been allocated, as well as the value of the structured investment account.

The insurer’s separate account is a segregated account that holds several variable subaccounts tailored by objective, risk level, and underlying portfolio.

Separate accounts are not governed by state insurance law requirements for secure, fixed income securities and can be funded with common stocks and other more volatile securities.

Separate accounts are maintained by professional investment advisors, just like mutual funds.

The insurer’s general account, which is generally invested in bonds and other fixed-income securities, supports fixed and fixed index annuities.

Fixed and variable Annuities at a glance

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

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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