What is the difference between "fixed" and "variable" annuities?

The distinction between fixed and variable annuities is primarily centered around the nature of the returns they provide. Fixed annuities are designed to offer a guaranteed return on the investment, which means that the annuitant is assured of a certain rate of interest over a specified period. This makes fixed annuities a safer choice for individuals who prefer stability and predictable income.

In contrast, variable annuities do not guarantee a specific return. Instead, their value fluctuates based on the performance of the underlying investment options, which typically include a range of mutual funds or other investment vehicles. This variability means that while there is the potential for higher returns, there is also a risk of reduced returns or losses, depending on market conditions.

Understanding this fundamental difference is crucial for individuals considering annuities as part of their financial planning, allowing them to align their investment choices with their risk tolerance and financial goals.