Whats the difference between fixed and variable annuities?
Fixed annuities earn a guaranteed interest rate during a certain period. They are backed by assets in an insurance company’s general account, usually bonds. Fixed annuities depend entirely on the financial soundness of insurers, which are regulated primarily by state insurance departments. Variable annuities can also come with guaranteed benefits, such as a death benefit and a minimum return, riders for which the buyers generally pay extra. In other ways, though, they are quite different: A portion of deposits go to the insurance company to cover administrative costs and guaranteed benefits; the rest is invested in a portfolio of mutual-fund-like investments. These accounts are separate from the rest of the insurance contract and belong to the annuity owner, so they are not as vulnerable to the insurer’s fate. Variable annuities, however, are more exposed to market risks. If annuity owners’ investments perform well, there’s the potential upside of a bigger payout. But if they do poorly
