What is the Difference Between Fixed Annuities and Variable Annuities

This is a question that is often perplexing to the average individual. A variable annuity differs from a fixed annuity because it does not in any way guarantee an interest yield from investments made. The value of a variable annuity is primarily based upon the performance of underlying investment portfolios. There is a way to receive a fixed-rate account with variable annuities that can be guaranteed by the insurance company that issues the annuity.

Variable annuity owners can direct the allocation of a contract value among subaccounts that correspond to a wide range of underlying mutual funds, which include equity funds, bond funds, funds that combine equities and bonds, actively managed funds, index funds, domestic funds, and international funds.

Variable annuities can provide a professional management of funding, tax-differed earnings with no limits on contributions and guaranteed income and death benefit.

Fixed annuities offer a guaranteed interest at least a minimum rate of investment return. The insurer will declare a specific credited rate of return based on the investment performance of its general account assets. The insurance company will guarantee a minimum interest rate for a deferred fixed annuity, this is also referred to as a minimum credited interest rate which the annuity owner’s purchase of payments are invested in the insurance company’s general account. The dollar amounts of the annuity income payments are based on the payment rates guaranteed at the time of the deferred annuity agreement, this is when the annuity reaches the payout phase.

Generally, fixed annuities may be less of an investment risk than variable annuities because they offer a guaranteed minimum rate of interest. The minimum rate will not be affected by fluctuations in market interest rates or the company’s yearly profits.