Know The Difference! Fixed, Variable & Indexed

Paul K. Dunn
May 9, 2017
2 min read

Its important to know the difference between Fixed, Index and Variable Annuities.

Here are the basics:

Fixed Annuity

Fixed annuities have fixed payouts to the investor. When you go to purchase an annuity you are given options as to whether the payments are tied to inflation or if they stay at the same rate for the entire time. Having the payments tied to inflation costs more than getting the same payment for the entire period of the annuity.

For example, a 65 year old man might exchange $250,000 of his portfolio for $1,418 in monthly payments for the rest of his life. That’s about 6.8% returned to him each year.

At its most basic level a fixed annuity acts like a certificate of deposit. Retirees can choose to give up a portion of their portfolio in order to receive the security of consistent payments to go along with other retirement income streams. Giving up the entire portfolio has its own risks and is usually not recommended, but trading in 25% to 50% can provide the monthly income security you might be looking for.

Generally, fixed annuities involve less investment risk than variable annuities because they offer a guaranteed minimum rate of interest. The minimum rate is not affected by fluctuations in the market interest rates or the company's yearly profits. Some people like the security of knowing that their annuity payments will never vary or that they will receive at least a minimum amount of credited interest. Although they are less risky, fixed annuities generally offer less investment flexibility and less opportunity for growth than variable annuities.

Variable Annuity

A variable annuity is opposite of a fixed annuity. It allows you 'the investor' to choose from a wide range of investment options called "sub-accounts". Instead of consistent monthly payments, the amount you receive is based on the performance of the investments within the annuity. sub-accounts. Simply put, If the market skyrockets so do your payments, but if the market declines, your payments will too. Sub-accounts are available only to investors in variable annuities, variable life insurance contracts, and in some cases, 401(k) plans, IRAs, and certain other investors permitted by applicable tax laws and regulations. Assets in a variable annuity can be transferred between sub-accounts tax free. As a result, investment decisions can be made based on an investor's needs and strategy without worrying about the tax implications.

Indexed Annuity

An indexed annuity is a fixed annuity that typically provides the contract owner with an investment return that is a function of the change in the level of an index, such as the S&P 500, while guaranteeing no less than a stated fixed return on the investment. These products are designed for individuals who want to partake in the benefits of a market-linked vehicle with a protected investment floor, if there is a downturn in the benchmark index. Some indexed annuities also offer riders that guarantee income for life, even if the annuity value declines to zero.

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