Variable vs. Fixed Index Annuities

Chances are if you’re reading this article, you’re not a financial professional. 

That’s fine. We all have to start somewhere on our investment journey, especially when it comes to the complex and confusing world of fixed-indexed annuities vs. variable annuities.

What are the Differences between a Variable Annuity vs. a Fixed Annuity?

Before we can describe fixed-indexed annuities, it’s important to first understand the most basic forms of annuities: fixed annuities and variable annuities. 

Fixed Annuities

Fixed annuities are financial products that offer guaranteed rates of return for a set period of time after an investor funds an investment account with a lump-sum payment or regular premium payments. 

The advantage of fixed annuities is that they offer a guaranteed rate of return which makes them a great choice for conservative investors who want to minimize their risk. However, the trade-off is that if the underlying investments of the insurer perform well, the investor doesn’t get to see their money accordingly. 

Variable Annuities

On the other hand, variable annuities don’t have the guaranteed rates of return after an investor funds an investment account with a lump-sum payment or regular premium payments. Instead, the performance of the investment is directly tied to the growth of the underlying investments. 

While there’s certainly more risk involved if the investments experience a downturn marked performance, the upside is that investors can enjoy much higher rates of return when compared to similar fixed annuities. 

Fixed vs. Variable Annuity Pros and Cons

Need a quick reference to understand how these stack up? Let’s take a look at the pros and cons of fixed annuities and variable annuities:

Fixed Annuities

Variable Annuities

Of course, these are just the basics of fixed and variable annuities. An independent insurance agent can help you find the right financial product that aligns with your long-term investment strategy, weighing the fixed vs. variable annuity pros and cons in an easy-to-understand manner. 

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What Are the Differences between Fixed-Indexed and Variable Annuities?

Now that you have a basic understanding of fixed and variable annuities, let’s take a look at the difference between fixed-indexed annuities and variable annuities.

Fixed-Indexed Annuity

A fixed-indexed annuity is a type of annuity that enables investors to enjoy the guaranteed returns of fixed annuities while also enjoy the performance of the underlying investments in such indexs as the S&P 500, NASDAQ, and more. 

This means that the guaranteed portion of the annuity pays between 1% to 3% reliably, offering a low-risk base for your investment to avoid inflation. 

Furthermore, a fixed-indexed annuity has something called a “participation rate”. The participation rate is the portion of the account that is geared towards the performance of the underlying stocks. 

If, for example, you invested with an 80% participation rate and the underlying stocks increased by 10%, you would enjoy 8% returns. 70% participation rate would yield 7%, so on and so forth. 

Variable Annuity vs. Indexed

Variable annuities, on the other hand, offer a higher growth potential if underlying investments perform well. Most variable annuities don’t have guaranteed rates of return, although some protection can be in place to protect the principal investment. 

Depending on the insurance company you choose, you may have more options as to where your annuity’s funds are invested. And on a side note, many insurers cap the maximum return rates for variable annuities. So, it’s important to fully understand the reality of how variable annuities work. 

Therefore, when it comes to variable annuity vs. fixed-indexed annuity, speaking with an independent insurance agent can guide you through the vast amount of insurers, investment portfolios, and more. 

Having realistic guidelines about the performance of these investments with the assistance of an independent insurance agent is, therefore, an important step towards sound financial planning.

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