The Difference Between Fixed and Variable Annuities

A variable annuity is different from a fixed annuity in that it does not guarantee an interest yield from investments. The variable annuity’s value is based on the performance of underlying investment portfolios. However, some variable annuities also offer a fixed-rate account which is guaranteed by the issuing insurance company.

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The benefits that variable annuities provide are professional management of funding, tax-deferred earnings without limits on contributions, and a guaranteed income and death benefit.

With the variety of funding options available, variable annuities may be attractive options to people at many stages of life. Like a fixed annuity, variable annuities may be set up on an immediate or deferred basis. The investor either begins receiving income from the annuity immediately or some time in the future.

There is a tendency to compare variable annuities with mutual funds because of the varying values of the underlying portfolios in the variable annuities, but they are very different and may each have its own reason for being in your retirement savings program.

One of these differences is that a variable annuity may provide payout for a lifetime while mutual funds may be depleted by withdrawals on the account. Another important difference is that variable annuities have insurance-related costs and mutual funds do not.

With all of the major and minor differences in fixed annuities, variable annuities, and mutual funds, it is important to consult with your financial advisor to ensure that you are making smart money decisions.

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