With a fixed annuity, the life insurance company agrees to pay a fixed rate of income to the investor for life after a certain date. Moreover, the insurance company assumes the risk of the performance of the annuity's securities by directing the investment of the annuitant's principal into a portfolio of fixed-income investments. When the annuitant decides to begin the payout phase, the amount of income he or she receives is determined by a combination of the account's value and the investor's mortality expectancy.
Unlike a fixed annuity, a variable annuity has no guaranteed returns because the investor's principal is invested in one or more sub-accounts comprised of stocks, bonds and money market instruments. (However, most variable annuities do offer a sub-account that has a fixed rate of interest.) Nevertheless, the investor who wants to stay ahead of the rising cost of living will choose a variable annuity over a fixed one because the fixed annuity will lose its purchasing power over time.
From a regulatory perspective, each annuity if treated separately. If you purchase a variable annuity, you will receive a prospectus since the assets you contribute are invested in sub-accounts, which are essentially mutual funds. So variable annuities are treated like a mutual fund would be. Fixed annuities are regulated by state insurance commissioners since they're considered an insurance product. Be sure to check with them to confirm that your insurance broker is registered to sell insurance in the state, and inquire about whether your state has a guaranty association that provides some level of protection if an insurance company doing business in that state fails.
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