dcsimg

FIXED ANNUITY RATES VS. VARIABLE ANNUITY RATES

By Compuquotes Team on July 28th, 2009

Annuity

SECURITY VS. RATE OF RETURN

So which is it: a fixed annuity or a variable annuity? Many people who are contemplating about purchasing an annuity have trouble deciding between the two. Is a fixed annuity safer? Will the rate of return be larger with fixed annuity rates or with variable annuity rates? This article will attempt to answer these questions and the usual ones that you ask regarding these two kinds of annuities.
Annuities are savings investment and are often used as a retirement income. You put in money as an investment and this money is returned to you along with the earnings that it earned, either as a lump sum or as annuities - a series of payments paid over time. For the purpose of our discussion, all reference to payments means annuity payments. Furthermore, fixed and variable annuity interest rates refer only to deferred annuities - annuities wherein the payout is delayed to allow the investment to earn. Any reference made to interest rates also refers to deferred annuities.

In a fixed annuity, the investment accumulates at a fixed rate. Fixed annuity rates are determined by the insurance company based on economic conditions. Because money grows at a fixed rate, the annuitant (recipient of the annuity) receives an equal amount of money every period.

In a variable annuity, the premium amount is divided and invested into different funds - stocks, bonds, etc. The amount of earning is based on how these funds perform. That's why the annuity rates for this kind of annuity vary along with the variations in market conditions.
Fixed annuity is ideal for those who have a conservative stance when it comes to investment. Fixed annuity rates are stable and a fixed income is guaranteed. The investment does not oscillate along with the stock market. The investment is basically exposed to lesser risk. It is not affected when the market goes down but neither is it when it goes up.

Variable annuities are high-risk as compared to fixed annuities - when the market plummets, so does the earnings. The reverse is also true. When the investments perform really well, the earnings are way greater than those of fixed annuities. In variable annuities, you also get to choose where your funds are invested. You do not get this control in fixed annuity.

So as the question of which annuity is better, it should ultimately boil down to what your needs are and how you want to receive your payouts. A fixed annuity vs. a variable annuity is just like comparing bank CDs to a mutual fund. It's really about a question of security vs. rate of return. A fixed annuity offers security by providing a fixed income but you may find yourself in the losing end when the market performs tremendously. You do not have to get as much security in a variable annuity but you may have higher rate of return and consequently, more money.

You may also move beyond fixed annuity rates and variable annuity rates and try to consider retirement options other than annuities. Who knows, your needs may be better met by other alternatives than by annuities.

Featured Insurance Quote
Twitter
Facebook 470 flares Google+
470 flares ×