Fixed vs. Variable Annuities: Which is Better
There are many types of annuities and sub-types of annuities that there are to choose from. However, the two most common are fixed and variable annuities. In this article, we will outline what they are and how they can work for you.
Before we get into the specifics of fixed and variable annuities, we will just quickly overview what annuities are. An annuity is an insurance product. It is a contract between you, the annuitant, and an insurance company. The insurance company agrees to pay you a certain amount of money for a specified amount of time. You, however, must keep your money in the annuity for a specified amount of time. Annuities are generally considered to be safe investments because they guarantee payout to the annuitant.
Fixed annuities, generally speaking, are the safest kind of annuities. With this type of annuity, you are guaranteed to receive a certain percentage of interest on your initial investment during the accumulation period of your investment (or before you being to draw out money). Some companies will offer up to a 7% yearly increase to later generate an income stream. However, such good outcomes cannot come without any downsides. If you choose to put your money into a fixed annuity it will be locked up for a certain time period. This can be up to 10 years that you cannot touch your money without incurring any penalties.
At the time of purchasing a variable annuity, you will have to choose from a selection of different investments called subaccounts. In variable annuities, you have no guarantee on your money. If the investments you choose perform well you will make a lot on your investment. However, if the investments that you choose fail you could lose some or all of your money.
When it comes to payouts, you have several options. You can either choose a fixed payment like a fixed annuity. Or you can choose a variable payout or a combination of the two. So the benefits of the variable annuities are flexibility with payouts, however, you carry greater risk.
Which is For You?
Whenever you are looking into different investments to choose from you need to be sure that the investment will work for you and your situation. Meet with a qualified investment advisor who can educate you on all of the nuances of the products and help you choose the best company to invest with.
Whether a fixed or variable annuity will work best for you will depend on your risk tolerance and the stage of life you are at. If you have a high-risk tolerance a variable annuity may be a good option. However, if you are more reserved when it comes to investing, a fixed annuity may be the best option for you. You also need to consider how close you are to retirement. If you are just starting out investing you may be able to use a variable annuity since you will have time to recover any losses. But if you are nearing retirement a fixed annuity may be a better option for you since it will afford you greater security. Before you make any decisions meet with a qualified professional who can help you make the best decision.