Variable Annuity vs Fixed Annuity
An annuity whose value rides on subaccounts the owner chooses - a security. An annuity paying a guaranteed rate from the insurer's general account.
What is the difference between Variable Annuity and Fixed Annuity?
Fixed = insurer bears investment risk, guaranteed rate, not a security. Variable = owner bears risk in subaccounts, is a security.
| Variable Annuity | Fixed Annuity | |
|---|---|---|
| In one line | An annuity whose value rides on subaccounts the owner chooses - a security. | An annuity paying a guaranteed rate from the insurer's general account. |
| Example | A client exchanging one annuity for another can use a Section 1035 exchange to avoid tax, but may trigger a new surrender charge. | A 5-year fixed annuity guaranteeing 4.5%, with surrender charges for early withdrawal. |
| Unit | Equities, Funds & Alternatives | Equities, Funds & Alternatives |
| Series 65 | Section 2: Investment Vehicles | Section 2: Investment Vehicles |
What is Variable Annuity?
Premiums go into a separate account invested in subaccounts, so the owner bears the investment risk. Because of that, it is a security as well as an insurance product, and selling it requires both licenses. Growth is tax-deferred; withdrawals come out earnings first and are taxed as ordinary income, with a 10% penalty before 59 1/2. Mortality and expense charges and rider fees make it expensive. Heirs receive no step-up in basis.
What is Fixed Annuity?
The insurer guarantees principal and a minimum rate, so the insurer bears the investment risk. Not a security - regulated as insurance. The main risk for the owner is purchasing power: fixed payments lose value to inflation.