Fixed vs Variable Annuities

In a fixed annuity, the insurance company guarantees the principal and a minimum rate of interest. In other words, as long as the insurance company is financially sound, the money you have in a fixed annuity will grow and will not drop in value. The growth of the annuity and/ or the benefits paid may be fixed at a dollar amount or by an interest rate, or they grow by a specified formula. The growth of the annuity;s value and or/ the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. Some fixed annuities credit a higher rate of interest than the minimum, via a policy dividend that may be declared by the company's board of directors, if the company's actual investment, expense and mortality experience is more favorable than was expected. Fixed annuities are regulated by state insurance departments.

Money in a variable annuity is invested in a fund, like a mutual fund but one open only to investors in the insurance company's variable life insurance and variable annuities. The fund has a particular investment objective, and the value of your money in a variable annuity- and the amount of money to be paid out to you- is determined by the investment performance of that fund. Most variable annuities are structured to offer investors many different fund alternatives. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission.