Insurance firms commonly offer their customers annuities, which are contracts that guarantee a future payment in recurring installments, typically monthly and frequently for life. However, even within that broad description, there are various annuities with distinct functions.
This raises the question of ‘What is the difference between fixed and variable annuities?
A fixed annuity ensures payments of a specific sum for the duration of the contract. It cannot drop or increase. However, variable annuities change in accordance with the performance of the mutual funds they are invested in. A variable annuity’s worth may increase or decrease.
What Does an Annuity Do?
Annuities are typically purchased as a supplement to other retirement income sources like pensions and Social Security. They may be assured that even if they exhaust their other assets, they will still have some additional income flowing in thanks to an annuity that offers guaranteed income for life.
What Is a Fixed Annuity?
In the event of a fixed annuity, the insurance provider promises the buyer a precise payment at a future time, which could be decades away or, in the case of an immediate annuity, today. The insurer puts money into secure investments like U.S. Treasury securities and highly rated corporate bonds in order to deliver that return. These investments provide steady, reliable returns, but they aren’t particularly exciting.
Furthermore, unless the buyer pays more for an annuity that accounts for inflation, the payouts on fixed annuities may lose buying power over time owing to inflation. Still, those who have a low-risk tolerance and don’t want to gamble with their regular monthly payouts may find fixed annuities to be a good fit.
What Is a Variable Annuity?
When a buyer selects a portfolio of mutual funds for a variable annuity, the insurer makes investments in those funds. The growth of the account and the size of the payout the buyer eventually receives will depend on how well those funds perform. Payouts from variable annuities can either be fixed or fluctuate based on the account’s performance.
Those that select variable annuities are prepared to assume some risk in the hopes of increasing their profits. Experienced investors who are knowledgeable about the various mutual fund kinds and the risks they carry are typically the best candidates for variable annuities.
Want to learn more about fixed and variable annuities? Trying to find the best annuity for you? Contact the professionals at Panichelle Insurance to learn more!