subject: Fixed Annuities Vs. Variable Annuities [print this page] What is the difference between fixed annuities and variable annuities? Before we go on to talk about the differences between these two, let's briefly cover what annuities are exactly. A contract between an insurance company and you, created to meet your retirement goals, under which a lump payment is given or a series of payments is given by you is considered an annuity. The insurer then agrees to make regular payments to you at some point in time.
Annuities usually provide a growth of earnings that are tax-deferred. They can also come with death benefits that can be paid to a beneficiary for a particular amount of money. This can be considered as your full total buying payments. When a withdrawal is done from the annuity, the gains will be taxed at regular tax rates for income. There will not be a tax on the capital gains. Early withdrawals from both fixed annuities and variables can subject you to hefty surrender charges to the insurance provider. You may also be faced with tax penalties.
There are basically three different types of annuities. These are fixed, indexed annuities, and variable annuities. When the insurance provider agrees to pay you no less than a rate of specified interest when your account is experiencing growth this is known as a fixed annuity. The insurance provider will also agree that the payments will be periodic and the payments will also be an amount of dollars that is specified and agreed upon beforehand. The time period may be indefinitely for these payments, or they can be twenty years, or some other time limit. They could even be for your life time or the life time of a spouse.
When you're dealing with an indexed annuity, the insurance provider will credit you with returns that will be founded on the changes in the S&P 500 SPI. This is a bit risky, but with some indexed annuities, you can have a contract value that's specified within the contract for no less than a certain minimum of dollars, regardless of the S&P 500's performance. Variable annuities enable you to select your purchase payments from a variety of options. These are usually mutual funds. The amount of payments you're going to receive, the rate of return on your purchase payments and other factors will depends on the performance of those mutual funds you've chosen. These annuities are regulated by the Stock Exchange Commission.
So now that you have an overview of each annuity you can see that the main difference between fixed annuities and variable is that you don't have as many options for investment with a fixed annuity. With variables you have more choices, but there is also more risk of not getting any returns and even losing money on mutual funds that are poor performers. You have a fixed payment for your retirement with fixed annuities, but then with variables you can get lucky and boost your payments four or five fold.
