Fixed vs Variable Annuities — Understanding the Difference

Fixed Annuities — Guaranteed Growth

A fixed annuity pays a guaranteed interest rate for a set period, similar to a CD. Your principal is protected and your growth is predictable. Fixed annuities are ideal for conservative savers who want certainty and do not want to risk their principal. They are a good alternative to CDs for longer-term savings because they typically offer higher rates and tax-deferred growth.

• Guaranteed interest rate
• Principal protection — cannot lose money
• Tax-deferred growth
• Predictable, stable returns

Variable Annuities — Market-Linked Growth

A variable annuity allows you to invest in sub-accounts similar to mutual funds. Your returns depend on the performance of the investments you choose. Variable annuities offer the potential for higher returns but also carry the risk of loss. They are more complex and typically have higher fees than fixed or indexed annuities. Variable annuities are regulated as securities and sold by licensed securities representatives.

• Returns linked to investment sub-accounts
• Potential for higher growth
• Risk of loss if markets decline
• Higher fees than fixed annuities
• Requires securities license to sell

Fixed Indexed Annuities — A Middle Ground

Fixed indexed annuities (FIAs) offer a middle ground between fixed and variable annuities. Your principal is protected from market losses, but your growth potential is linked to a market index (such as the S&P 500). When the index goes up, you earn a portion of the gain (subject to a cap or participation rate). When the index goes down, you earn zero — but you do not lose principal. FIAs are one of the most popular retirement savings products today.

• Principal protection — floor of 0% return
• Growth potential linked to market index
• Participation rates and caps limit upside
• Tax-deferred growth
• More complex than fixed annuities

Which Type Is Right for You?

Fixed annuities are best for people who want certainty and simplicity. Fixed indexed annuities are best for people who want principal protection with some growth potential. Variable annuities are best for people who are comfortable with market risk and want the highest potential returns. AG Insurance specializes in fixed and fixed indexed annuities — the products best suited for most retirees' needs.

Annuity Fees and Charges

Fixed annuities have minimal fees. Fixed indexed annuities may have rider charges for income benefits. Variable annuities have the highest fees, including mortality and expense charges, administrative fees, and investment management fees that can total 2–3% per year. Understanding fees is critical when evaluating any annuity.