What Is The Difference Between A Fixed And A Variable Annuity
An annuity is a contract with an insurance company in which you make one or more payments in exchange for a future income stream in retirement. The funds in an annuity accumulate tax deferred, regardless of which type you select.
Deferred fixed annuity
A deferred fixed annuity is an insurance-based contract that can be funded either with a lump sum or through regular payments over time. Fixed annuity contracts are issued with guaranteed minimum interest rates. The funds in your fixed annuity are able to build and earn interest during the accumulation phase. You don’t have to pay taxes on interest earned until it is withdrawn. By postponing taxes while your funds accumulate, you keep more of your money working and growing for you instead of paying current taxes. This means an annuity may help you accumulate more over the long term than a taxable investment.
Deferred variable annuity
A variable annuity is a contract that provides fluctuating (variable) rather than fixed returns. The key feature of a variable annuity is that you can control how your premiums are invested by the insurance company. Thus, you decide how much risk you want to take and you also bear the investment risk. Most variable annuity contracts offer a variety of professionally managed portfolios called “subaccounts” (or investment options) that invest in stocks, bonds, and money market instruments, as well as balanced investments. Unlike a fixed annuity, which pays a fixed rate of return, the value of a variable annuity contract is based on the performance of the investment subaccounts that you select. These subaccounts fluctuate in value with market conditions, and the principal may be worth more or less than the original cost when surrendered.
Variable annuities provide the dual advantages of investment flexibility and the potential for tax deferral. The taxes on all interest, dividends, and capital gains are deferred until withdrawals are made. When you decide to receive income from your annuity, you can choose a lump sum, a fixed payout, or a variable payout.
Annuities have contract limitations, fees, and charges, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.
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