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

Shawn Plummer

CEO, The Annuity Expert

A keen understanding of investment tools is paramount when planning your financial future. Among the most prevalent yet often misunderstood tools are annuities. This guide will delve into the heart of annuities, contrasting two significant types: fixed and variable annuities. We’ll be breaking down the complexities surrounding a fixed vs. variable annuity, illuminating their differences, and the pros and cons of each annuity. Let’s begin this journey to financial enlightenment!

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Understanding the Annuity Landscape: The Basics of Fixed and Variable Annuities

In their simplest form, annuities are contracts sold by insurance companies designed to provide an income stream during retirement. We must first understand their essential distinctions when comparing fixed vs. variable annuities.

Fixed Annuities Explained

Fixed annuities promise a guaranteed income, regardless of market conditions.

Helpful Tool: fixed annuity calculator

Variable Annuities Unveiled

Unlike their fixed counterparts, variable annuities are tied to the performance of investment portfolios, offering potentially higher returns, albeit with greater risk.

Helpful Tool: variable annuity calculator

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

Diving Deeper: The Inner Workings of Fixed and Variable Annuities

We delve deeper into their respective mechanisms to further differentiate between a fixed annuity and vs. variable annuity.

The Mechanisms of Fixed Annuities

Fixed annuities involve payments to the insurance company in exchange for a guaranteed income stream.

How Variable Annuities Work

Variable annuities, on the other hand, allow the annuitant to allocate premiums among various investment options.

Fixed Vs. Variable Annuity

Weighing Your Options: Comparing Fixed Annuities vs. Variable Annuities

Understanding the distinction between fixed and variable annuities is just the beginning. Next, we need to weigh the pros and cons of each type of annuity.

The Advantages and Disadvantages of Fixed Annuities

Fixed annuities are often favored for their predictability and safety. However, this security comes at the cost of potentially higher returns.

The Pros and Cons of Variable Annuities

Variable annuities may offer higher returns if the investments perform well. Nevertheless, they also come with greater risk.

Variable Vs. Fixed Annuity

Deferred Fixed Annuity Vs. Deferred Variable Annuity

A deferred fixed annuity guarantees a set rate of return over a specified period and begins payouts at a future date, providing predictability and safety. On the other hand, a deferred variable annuity has returns tied to the performance of investment sub-accounts chosen by the annuitant, offering higher potential returns but with increased risk.

A Noteworthy Contender: Fixed Indexed Annuities

While our focus is variable vs. fixed annuities, it would be remiss, not to mention fixed indexed annuities. This hybrid product offers the safety of fixed annuities with the growth potential of variable ones.

Example: Another option to consider is a fixed indexed annuity, combining fixed and variable features. Take Lisa, who likes the security of a fixed annuity but also wants the potential for higher returns. She chooses a fixed indexed annuity, where her returns are linked to the performance of a market index, such as the S&P 500, but also offers a minimum guaranteed return.

Fixed Vs Variable Annuity

Next Steps

The decision between a fixed and variable annuity requires careful consideration of your financial goals, risk tolerance, and retirement timeline. While fixed annuities provide security, variable annuities bring growth potential, albeit with more risk. And don’t forget about fixed-indexed annuities, which aim to offer the best of both worlds. Whichever path you choose, ensure it aligns with your vision for your financial future.

For What Reason Would An Individual Choose A Variable Annuity Over A 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

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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