What are the differences between variable, fixed and immediate annuities?

There are many, many different types of annuities. 

To begin with, it makes sense to think about the general definition of an annuity.  An annuity is a contract that converts a sum of money into a series of periodic payments for an agreed upon period of time. An annuity can be thought of as a financial vehicle that converts a pool of money into a stream of income.

A fixed annuity provides a guaranteed rate of interest during the accumulation period and a guaranteed (“fixed”) amount of income when the contract is annuitized. With a fixed annuity, the insurance company is responsible for investing the premium payments and therefore assumes investment risk. The insurance company is obligated to provide guaranteed annuity payments regardless of whether their investments have generated an adequate rate of return.

In contrast to a fixed annuity, the key features of a variable annuity can fluctuate (they are “variable”) during the accumulation period and during the payout phase. Also in contrast to a fixed annuity, the variable annuity contract holder assumes much of the investment risk. With a variable annuity, the insurance company provides the contract holder with the ability to determine how his or her premiums are invested. One investment option is a variable account which typically consists of equity, bond or money market mutual funds. The other option is the general account of a variable annuity which provides a guaranteed return. The contract holder decides how much risk or variability they want to tolerate by allocating premium payments among the general and variable accounts. The amount of money accumulated and the amount of income during the payout phase are determined by the returns of these accounts.

Variable annuities can also come with living benefits or guaranteed living benefits.  These optional features have been very popular over the past several years and they have the potential to make variable annuities much more flexible and attractive.

An immediate annuity refers to a type of annuity with payouts that commence shortly (within months) after the annuity has been purchased. Immediate annuities are purchased with a single (lump sum) premium payment. Immediate annuity payments can be either fixed or variable. The payout period can be a certain amount of time such as 10 years, or can be guaranteed for the duration of the annuitant’s life (a life annuity).