In addition to differentiating between immediate and deferred annuities and fixed-period and term-certain payouts, insurers also categorize annuities as to whether they are fixed or variable. (Be careful not to confuse a fixed annuity with a fixed-period payout.) Classification as a fixed or variable annuity refers to the underlying investments during the accumulation phase of the annuity:
- A fixed annuity is invested in the general fixed account of the insurance company.
- A variable annuity is invested in separately managed subaccounts (that function similarly to mutual funds) selected by the annuity owner.
Variable annuities often have additional features to help manage the risk of their underlying investments, such as guaranteed death benefits or newer living benefits that provide company guaranteed payments for owners or beneficiaries even if (or especially if) they would be higher than actual investment performance would provide for.
Newer annuities also may offer a variable option during the payout phase (whether for a fixed or term-certain period). A variable annuitization contract provides payments that may fluctuate up or down depending upon the performance of the underlying subaccount investments. A fixed annuitization contract provides payments that remain the same through the payout phase (or occasionally increase by some set rate to keep pace with inflation; however, this rate is:
- predetermined and contractual;
- still invested in the insurance company’s general account; and
- thus, still considered a fixed payout.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM