Annuities are contracts normally issued by the insurance companies. They provide an individual person with a means of income. To receive the payments; you have to pay some lump sum amount of money to the insurance company. You will be paid out in periodic installments and where the payments starts immediately, it is referred to as the immediate annuity. It is a promise that insurance makes that it will offer periodic payments for a certain time to the purchaser of the annuity. They are sold as insurance products making them have the insurance like features.
In differed annuities, payments begin at a certain date in the future e.g at age 65 or 67 to be parallel with retirement. It gives the annuitant more payment. Periodic investments are made by the investors to build a large sum and after the buildup, payment begin. In simple terms differed annuities involves making periodic investments in order to have large sums and once the large sums are made, payments then begin. The fixed annuity and the variable annuity are a type of deferred annuity and in this article, we will try to differentiate them.
I know you are asking yourself about the difference between variable annuity and fixed annuity. Payments in the case of fixed annuity are fixed while in variable annuity it is dependent on investment performance that a certain annuity has. Fixed annuity is nearly the same as the defined benefit pension plan like social security while the variable annuities are nearly similar to the defined pension plan.
Fixed annuities are less risky while the variable annuities are very risky. If one is looking for a safer way of investing when it comes to annuities, then the fixed annuity is the best choice. A fixed annuity ensures that you have a guaranteed return at the end of every month. You are assured of a steady income with fixed annuities than in the case of variable annuities. What makes variable annuities risky is the fact that their investment portfolio usually is not stable.
They fluctuate with the market and it is difficult for one to have guaranteed monthly rates of return. One month you could be making a lot of money the next you could be making a lesser amount of money. You will only benefit from variable annuities only if your returns are high. With variable annuities, you are not guaranteed. Stabilized income from investments is usually experienced with the fixed annuities and people who are in the work force and about to retire usually prefer them. This is because they offer one with an income on a regular interval.
A key feature for variable annuities is the separate accounts, which are usually separate from the general account for the insurance company. The gains, interests, losses and dividends are separate except the insurance company’s finances. Securities are held in a pooled form and that is why we have a separate account, which makes it similar to the mutual funds. In fixed annuity we have the general account.