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Fixed vs. Variable Annuities
Annuityproducts have grown more sophisticated over the years to meet the demands of[link widoczny dla zalogowanych]ay's more sophisticated investors. Justas mutual funds grew in popularity as an alternative to certificates ofdeposit, the variable annuity was developed as an alternative to the fixedannuity. Variable annuities offer potentially higher returns than fixedannuities. Of course, there is a risk of loss as well. So, deciding whichannuity product to invest in often comes down to deciding how much risk you arewilling to take. Fixed annuities provide certain guaranteesWhenyou purchase a fixed annuity, the issuer guarantees that you will earn aminimum interest rate during the accumulation phase and that your premiumpayments will be returned to you. If you annuitize the contract (i. e., take alifetime or other distribution payout option), the issuer guarantees theperiodic benefit amount you will receive during the distribution phase. (Guarantees are subject to the claims-paying ability of the issuing insurancecompany. ) The interest rates earned during the accumulation phase will reflectcurrent fixed income rates,[link widoczny dla zalogowanych], changing periodically. During the distributionphase, the payment is based on the prevailing interest rates at the start ofthe distribution phase, and then remains constant. This fixed payment may losepurchasing power over time due to inflation. Consequently, many investors arehesitant to lock in a fixed annuity payout rate. Variable annuities provide growth opportunities instead of guaranteesWhenyou purchase a variable annuity, the annuity issuer offers you a choice ofinvestment options in what are known as subaccounts. The issuer may offer manydifferent types of asset classes such as stock, bond, and money market funds. The issuer of a variable annuity does not guarantee or project any rate ofreturn on the underlying investment portfolio. Instead,[link widoczny dla zalogowanych], the return on yourannuity investment depends entirely on the performance of the investments thatyou select. Your return may be greater than or less than that of a fixedannuity. However, if you die before you begin receiving annuity distributions, your heirs will receive at least as much as the total of your premium payments, regardless of the annuity value. Ifyou elect to annuitize and receive periodic distributions from your variableannuity, you can choose to receive either a fixed payout (like with a fixedannuity as previously discussed), a variable payout, or a combination of thetwo. If you select a variable payout, then the amount of each payment willdepend on the performance of your investment portfolio. If the portfolioincreases in value, then your payments will increase as well. Most annuityissuers offer a third option that allows you to lock in a minimum fixed paymentevery month, with the possibility of an additional variable payment based onthe performance of your investment portfolio. By allowing your principal toremain in investment accounts during the distribution phase, you have thecontinued opportunity to benefit from rates of return that are higher than whatwould have been received with a fixed annuity. But remember, you also run therisk that your payout could be lower if your investment choices do not performwell. Which is better? First, make sure that an annuity is appropriate for you. Annuities are long-termsavings vehicles used primarily for retirement. There are many advantages toannuities, but there are drawbacks, too. These include a 10 percent tax penaltyon earnings distributed before age 59?, and the fact that all earnings aretaxed at ordinary rather than capital gains rates. If an annuity is right foryou, then the choice between fixed and variable annuities will depend on yoursituation and preferences. Usually, [link widoczny dla zalogowanych]sing between the two comes down to your risk tolerance and the amount ofcontrol you want over investment decisions. With a fixed annuity, there islittle risk. You know what you're going to get out of the annuity. However,[link widoczny dla zalogowanych], thegrowth potential of a fixed annuity is limited. A variable annuity, on theother hand, has a much greater potential for growth (although with this growthpotential, there is a greater potential for loss). You also have theopportunity to make the investment decisions that will impact the growth ofyour annuity. How much risk you can comfortably accept, and your ability tomanage your investment,[link widoczny dla zalogowanych], will help you choose between a fixed and a variableannuity. Note: Annuity withdrawals and distributions prior to age 59? may be subject to a 10%federal tax penalty unless an exception applies. Note: Variable annuities are long-term investments suitable for retirement fundingand are subject to market fluctuations and investment risk, including thepossibility of loss of principal. Variable annuities contain fees and chargesincluding, but not limited to, mortality and expense risk charges, sales andsurrender (early withdrawal) charges, administrative fees, and charges foroptional benefits and riders. Note: Variable annuities are sold by prospectus. You should consider the investmentobjectives, risk, charges, and expenses carefully before investing. Theprospectus, which contains this and other information about the variableannuity, can be obtained from the insurance company issuing the variableannuity, or from your financial professional. You should read the prospectuscarefully before you invest. 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