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What are the differences between a variable deferred annuity and a fixed deferred annuity?

Feb 29, 2012 by Santos from Spokane, WA in  |  Flag
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Santos, in addition to the above answers which are excellent, an easy way to think of the main difference between the two types of annuities is in the Variable annuity YOU are controlling the investment choices and accepting the investment risk. In the fixed annuity, the INSURANCE company is controlling the investment choices and accepting the investment risk. The best choice for you lies with your circumstances. You should seek the advice of an insurance / financial professional and be sure they understand your needs.

Comment   |  Flag   |  Mar 01, 2012 from Midland, TX

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Santos, In answering your question, I'll feel the need to put a different spin on the response than my esteemed colleague by stating that annuities (be it variable or fixed) are not synonymous with income stream. While it is true that all annuities offer income stream options, they all also offer an opportunity to grow it as an investment and walk away with the full results at a future date (without an income stream being required, but rather being an option found in all contracts).

To answer the questions, the key differences are variable as opposed to fixed. Variable annuities have the equivalent of mutual funds inside (called sub-accounts meant to mimic the publicly traded mutual fund equivalent). There are a variety of subaccount choices and you choose your investments inside. Where with fixed annuities it can be best described as like a CD. You get a fixed interest rate which is typically declared each year, although may be locked in for the length of the contractual agreement. So the difference is the underlying investment.

Both will not have any tax on investment gains until they are distributed to you. Both will offer income options, and most offer some guaranteed lifetime income stream at added costs. The best way to view the guaranteed income stream is to think of it as a onetime deposit in exchange for a lifetime pension. Someone presenting a variable annuity needs to have both securities and insurance licenses, where one would only need an insurance license to sell a fixed annuity. It is said that variable annuities have higher fees, and that is true, but they also have higher earning potential. I always ask a client that is worries about fees if they would rather have a 6% return with a 1% fee, or a 10% return with a 2% fee. Sometimes the fee is less important than the expected results.

Comment   |  Flag   |  Feb 29, 2012 from East Dundee, IL

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Hi Santos, I hope my colleagues also will comment on this one - it could take many pages to fully address your question. Briefly put, both annuity types you mention are deferred (create a stream of payments in the futreu) but variable annuities invest in mutual funds so the value is "variable." The fixed annuity takes a lump sum and delivers a predictable stream of income that is not steered by investment choices. Typically in my practice I see many variable annuities that were needlessly purchased by prospective clients. This area is truly a "caveat emptor" (buyer beware) area since variable annuity commissions are high and the purchases (annuitant) may be stuck with unnecessarily high fees and have his/her hands tied. Advice about annuities also differs if you're planning on using qualified (already tax-deferred) money or non-qualified (after-tax) money for this type of purchase.

Comment   |  Flag   |  Feb 29, 2012 from Berkeley Heights, NJ

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