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Fixed vs. Variable Annuity

 fixed vs variable annuity

Fixed and variable annuities may be appealing for a number of reasons - especially guaranteed income. Yet many people find it hard to discern what may be good annuity options for them. And that's as their fear of running out of retirement money remains strong.

Americans are more afraid of running out of money in retirement than they are of dying, according to a well-quoted statistic from Allianz Life. Of 3,000 people surveyed, 63% said they feared not having enough retirement money for life over leaving this Earth. That was the highest percentage of those who mentioned their financial concerns in the survey. 

Fears like this are what drive Americans to look for dependable income-paying vehicles. When shopping around for income solutions, many investors find annuities to be of interest.

If you are considering an annuity for your portfolio, it's important to understand everything before you make a decision. Knowing what a fixed versus variable annuity is, will be a good starting point.

Let's look at some of those distinctions now.

What are the Basics of a Fixed vs. Variable Annuity? 

There are many different annuity contract variations and flavors. Overall, they can be grouped into five basic types:

  • Immediate annuities
  • Variable annuities
  • Fixed annuities
  • Fixed index annuities
  • Multi-year guarantee annuities


There is one important distinction that sets variable annuities apart from all others. They are categorized by the Securities and Exchange Commission as securities (more on this below). This means, just like with stocks, bonds and mutual funds, they can only be offered by advisors who are securities licensed.

Fixed annuities, by contrast, do not have a direct policyholder investment in the market. Instead, insurance carriers invest premiums into underlying investments, of which the majority is often bond investments. Then insurance carriers credit interest to fixed contracts based on those underlying investments.

As a result, fixed annuities are categorized as insurance-based products. Financial professionals who are insurance-licensed agents commonly offer them.

Variable Annuities and Market Risk

Unlike other annuities, variable annuities come with market volatility risk that policyholders take on directly. That is because of variable annuities’ investment feature. With a variable annuity, you have the option to participate in “subaccounts." Or in other words, you can choose to put your premiums into stocks, bond funds, commodities funds, or other types of funds.

These investments grow tax‐deferred, so long as the money stays within the structure of the variable annuity. However, since these are financial products with changing market values, your principal and earnings are potentially exposed to losses.

It is possible to have your contract value sink below the original amount of money you put in, depending on market performance and fees. As a result, variable annuities may be subject to market risk.

Fixed Annuities and How They Differ

Unlike the variable annuity, fixed annuities do not subject your premium dollars to market volatility risk. There will be more on this in a bit.

In a fixed-type annuity, your money can grow a number of ways. This is the primary difference between fixed annuity products. Some come with pre-declared interest rates while others are index-based contracts.

While a fixed annuity offers a guaranteed-minimum fixed rate, a fixed index annuity is linked to an index. Many fixed index annuities are tied to the S&P 500® price index. When the index goes up, you can benefit from a percentage of its rise in value. Your money has the potential to grow with positive index changes.

If the index records positive change, additional interest is credited to your annuity. And should the index drop in value, your principal and the credited interest will be "locked in." You won’t lose money due to falling index values.

Growth Potential May be Limited

However, the growth potential is limited by certain measures:

  • When the index rises in value, you may be credited interest based on only part of that growth
  • You therefore can't benefit from the entire increase.
  • On the whole, fixed index annuities don't have the same growth potential as variable annuities.


With help from a knowledgeable annuity agent or financial professional, though, you may be able to enjoy a growth strategy that reflects a significant proportion of that growth. 

A way to think of this is a trade-off for the protection of your principal. While a fixed index annuity may be limited in its growth potential, the insurance company 'promises' to keep your principal safe from negative index changes. In many contracts, your credited interest will remain intact too. 

While fixed annuities can also come with fees, many fixed index annuities build their costs into the contract design, meaning those contracts won't charge you annual fees. Other contracts may have low fees.

Things brings up an important point. When credited interest is low, your contract may lose value due to fees from optional riders, surrender charges, or withdrawal charges.

Other Important Differences

According to the Financial Industry Regulatory Association (FINRA), the index-linked interest rate computed on an indexed annuity depends on the particular combination of indexing features that the annuity uses. That may include interest rate caps, participation rates, and an asset fee that some fixed index annuities use in addition to or instead of a participation rate.

There's something else that is important about variable annuities, too -- fees. Critics of the variable annuity point to fees and expenses that can range from 2%‐8% per year. Generally, those costs may vary depending on whether the market is rising or declining.

A hypothetical example can help us understand the potential impact of these fees: Say the cumulative fees for a variable annuity added up to 4.25%.

With a $250,000 investment in a variable annuity, that would come out to $10,625 in annual fees. Over the years, thousands of dollars in fees would add up significantly. And in the years of losses, those fees would be even more impactful.

Thinking of Annuities for Your Portfolio? 

Here's a note of caution to consider that applies to all annuity contracts.

Your receipt of lifetime income payments is dependent on the claims-paying ability of the insurance carrier. That’s why researching the history and ratings of the insurance company you enter a contract with is always a prudent move. And these are just a few factors to consider. 

With guidance from a knowledgeable financial professional acting in your best interest, you can uncover different annuity options that help you solve for your lifetime income needs. If you are ready for personal help, financial professionals at SafeMoney.com can assist you.

Use our "Find a Financial Professional" section to connect directly with a financial professional. Should you have any questions, concerns, or need a personal referral, call us at 877.476.9723.

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