Variable Annuity and Fixed Annuities
Annuities are also identified by their underlying investment options, such as fixed annuities and variable annuities:
Fixed annuities behave similarly to whole life insurance policies. The insurance company guarantees a rate of interest at which cash value grows in a general account and the annuity principal. The annuity principal is the premiums paid and invested to grow cash value.
Fixed annuity contracts pay out a death benefit if you pass away during the contract’s accumulation period. The death benefit is the accumulated value of the contract at the time of death. The formula to determine the death benefit of a fixed annuity is total premiums paid plus interest minus withdrawals and charges. If annuitized, fixed annuities are paid out in fixed periodic payments, like income.
Variable annuities do not guarantee an annuity principal or a growth in cash value. Like variable life insurance, variable annuity premiums are invested into a separate account where the activity of the cash value relies on the performance of the account’s related stock, bond, and money market sub-accounts. Variable annuities can offer between 20 and 30 sub-accounts, which you as the annuitant can choose to designate and even re-designate your premiums into.
If you purchase a variable annuity contract, you fully assume all risk of the sub-accounts. There is potential for a higher return than with a fixed annuity, but there is no guarantee. The value of the account could also decrease.
When you decide to start the annuitization process of a variable annuity contract, you are usually offered a choice between a fixed settlement option and a variable settlement option. Fixed settlements are level payments, and variable settlement payments depend on the contract’s sub-accounts. A variable annuity ‘s death benefit pays similarly to a fixed annuity. If you pass away before the annuitization of the contract, your beneficiaries will receive the value of the contract as a death benefit.
Fixed annuities and variable annuities both offer a stream of income over a period of time or for life. They also provide a death benefit to your beneficiaries should you pass away before the annuitization of the contract. The difference between the two policies comes into play in the manner of cash value accumulation. Fixed annuities, as the name suggests, have a guaranteed minimum rate of interest, and variable annuities ‘ cash value is dependent on the market performance of the sub-accounts.