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The difference between a fixed and variable annuity is that the value of a fixed annuity, and the payments you receive, stays the same no matter what interest rates or the markets do, wheres a variable annuity will fluctuate depending on the performance of the underlying investment.

People who have experienced stock market crashes often become big fans of fixed annuities. Fixed annuities pay you a predetermined amount, either immediately, or at some future point - say when you reach 65 - and make these payments to you for the rest of your life, or spouse's life your spouse outlives you and your annuity has this feature. Fixed annuities are based upon interest rates at the time you purchase them. You can quickly calculate how much you'll need to invest to get a certain amount of income, and you won't have to worry about how your investments do, you'll get the money you expect. Your money compounds tax-free, and is usually not subject to attachment by creditors.

Variable annuities base their returns on the performance of the underlying asset, such as the stock or bond markets. The value of you annuity will fluctuate depending upon how these markets perform. Variable annuities are the insurance industry's response to low interest rates which have made fixed annuities less attractive to many investors. Variable annuities retain the advantage of tax-free compounding, and also may be creditor-proof, but lose the certainty that made fixed annuities so attractive to risk-averse investors.

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