1 of 5

Write now Article Tools

Knowing the difference between a fixed annuity and a variable annuity can be what protects you from financial loss and buyer's remorse. Those two types of annuity are fundamental to the annuity concept. As such, they form part of an annuity matrix. The other dimension of the annuity matrix would be 'immediate vs. deferred' annuities.

Variable annuities were developed to overcome the shortcomings of fixed annuities. The basic difference between fixed annuities and variable annuities is orientation. Fixed annuities are income-oriented while variable annuities aim to provide growth opportunities to annuitants. This inherent difference precipitates other differences between the two forms of annuity.

1) Accumulation rate determination

Fixed annuities can either use a stock-index or declared interest to determine what rate the annuity accumulates at. The stock (or equity index) has a value that is computed as a fraction of the stock's overall value. That is a particular form of fixed-annuity incorporates an aspect of the variable annuity- hence, it is perceived as a hybrid.

Declared interest or market-value-adjusted annuity offers a rate that is linked to market performance overall, but is stable and steady. This type of fixed annuity therefore is based on the general level of market rates. For this reason- a middle ground that is easily achievable is selected. That is why fixed annuities of this nature hardly fluctuate.

Variable annuities operate in a similar manner to mutual funds. The pool of funds is created by the annuitants who contribute towards the variable annuity. The term 'interest rates' is not applicable to variable annuities. However, the 'rate of return' concept is. In some instances, annuitants are provided with fund options and can manage the level of risk they take. However, the rate of return with variable annuities is primarily determined by the investment performance net of expenses.

2) Expenses/ fees

Variable annuities have expenses and fees associated with fund management and investment returns. These expenses would be in addition to those stipulated by the typical annuity contract. Fixed annuities would have fees and charges associated only with the annuity concept. Still, some fixed annuities bear no expenses associated with the annuity contract after a specified period. Variable annuities would always be loaded with fees and expenses- that may even be hidden.

3) Payout phase

Annuities have a payout phase- where payments are disbursed according to myriad factors. The fixed annuity has a constant rate in the payout phase that is based on the prevailing market conditions or actuarial considerations. Variable annuities can provide either fixed or variable annuity payouts. The variable payouts are based on the annuity provider's fund performance as well.

4) Exposure and risk

Annuities- even variable annuities- may bear guarantees on contributions and returns. By extension, fixed annuities are significantly less-risky than variable annuities. A fixed annuity also provides better guarantees than a variable annuity; thereby increasing the security and stability of fixed annuities in comparison to variable annuities.

The discrepancy between fixed annuities and variable annuities is vast. It even extends to the fact that variable annuities are more heavily regulated. Variable annuities fall under the purview of the Securities and Exchange Commission (SEC) (as well as the relevant insurance regulators). That underscores the fact that the variable annuity is somewhat removed from fixed annuities. In most cases, fixed annuities are actually considered to be superior to variable annuities.

Learn more about this author, Darrell Victor.
Click here to send this author comments or questions.

Add your voice

Know something about The difference between a fixed and variable annuity?
We want to hear your view. Write now!