Annuities: Fixed Annuity vs. Variable Annuity

The main categories of annuities are a fixed annuity and a variable annuity. Annuity contracts may be issued only by life insurance companies and are regulated by individual States. Deciding on which type of annuity is best suited for you will require some research and maybe even a financial consultant's help.

Fixed Annuities

The fixed annuity interest rate you receive is set by the insurance company. If the insurance company is sound, financially that is, the money you have will grow and will not drop in value. Fixed annuities promise a lifetime of income as long as you live. The amount of money you receive in payments is decided by the amount deposited into the annuity and what kind of payout option is selected.

Fixed annuities offer a higher rate of return than certificate of deposits, especially with how low CD rates are these days. The advantage of this type of annuity is the relative safety, but it depends on the claims paying ability of the insurance company you buy the annuity from.Your principal will not diminish over time, unless you withdraw it.

Variable Annuities

The money you put into a variable annuity is money that is invested in a fund, just like a mutual fund but the fund is only open to people who invest in the insurance company's variable life insurance annuities and variable annuities.

The performance of a variable annuity is determined by the funds investment performance of the fund. Variable annuities have a little more risk associated with them.