What Is the Difference Between Fixed, Fixed-Indexed, and Variable Annuities?

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Annuities are a type of investment product that is commonly used for retirement planning. They can be described as contracts that provide payments to an individual, for either a specific time period, or the rest of your life. In simple terms, you will invest either a one-time payment, or smaller frequent payments, and in exchange, you will receive payments based on the amount you invested, plus your returns. Like a pension, annuities can provide financial security and guaranteed income.

Annuities can be classified into different types based on how the investments are earned and distribute returns. Three common types are fixed, fixed-index, and variable. Our AIB team is here to explain the key differences below!

Fixed Annuities

A fixed annuity can be described as an annuity that offers a fixed rate of return for a specified time frame. Your chosen insurance company will invest your premium (monthly payment) into low-risk opportunities like bonds of other fixed-income securities. The rate of return is set at the beginning of your contract and will not be affected by market fluctuations. A fixed annuity is a great option for someone looking for a stable and predictable source of income.

Variable Annuities

Variable annuities are annuities that allow you to invest your premium into a variety of options like bonds, stocks, or mutual funds. This type of investment is riskier than a fixed annuity as the amount of return is based on the performance of your investments, and a guaranteed rate of return is not offered. While this means that variable annuities have the potential to provide higher returns compared to fixed annuities, it also means your return rate can fluctuate. You may be able to make more profit in this case, but you also run the risk of potentially losing money.

Fixed-Indexed Annuities

Fixed-indexed annuities, also known as equity-indexed annuities, combine both fixed and variable features. Your insurance company will set a cap as to how much, and how little, can be earned on your return. This provides a fixed level of income, as well as the opportunity to earn additional returns based on other investments. While this generally protects you against losing income, it also limits the profits you might be able to make. This type of annuity is a great option for those looking for some security, and the potential for high earnings.

Looking For New Investment Opportunities?

Each type of annuity provides key differences in how income is earned and distributed to the policy holder. When looking at different investment opportunities, and planning for your future retirement, it’s important to carefully consider your financial goals, current and future circumstances, and willingness to risk money. At AIB, we offer annuities, long-term care insurance, life insurance, disability insurance, and more. Visit our website to contact our team today.