A Fixed Annuity pays a fixed rate of return that is guaranteed by the insurance company. The interest rate paid on fixed annuities may or may not outperform the returns of a variable annuity, however, they are guaranteed to grow and to never lose money.
Why would someone buy a fixed annuity? Fixed annuity investors are looking for a safe and guaranteed investment that provides them tax deferred growth. Many fixed annuities have an additional component called a fixed indexed annuity. It allows you to participate in some of the upside earnings of a stock index without the penalty of losing money in a down market. The Fixed Index Annuity never loses money.
A variable annuity allows the owner to invest in a portfolio of stocks, similar to a mutual fund. Variable annuities can produce high rates of returns in years the stock market does well, but they are also subject to stock market losses.
Why would someone buy a variable annuity? Variable Annuity investors are less concerned about market risk and are willing to risk a loss of principle for the chance at a high rate of return in a tax deferred investment.
Variable annuities are subject to their own rules, risks, and fees. Before investing in any annuity product, it is important to explore your options with a qualified annuity expert that is properly licensed in your state.
Annuities offer consumers great investment options, but poor annuity investments can be the result of getting unqualified advice. Before discussing an annuity purchase with your financial advisor, banker, lawyer, or accountant, it is important to confirm that they have been properly licensed to offer you advice on annuity products.
Next: Guide To Fixed Annuities