You have the choice of buying a fixed annuity or a variable annuity. Fixed annuities are generally considered to be more conservative. Variable annuities, having the potential for greater gains, have a higher risk.

Fixed Annuities

Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three, or five years. Once the guarantee period is over,
a new interest rate is set for the next period. The guaranteed interest rate of a fixed annuity is based on the claims-paying ability and financial health of the insurance company that issues the annuity.

Variable Annuities
Variable annuities typically offer a range of funding options from which you may choose. These funding options may include portfolios comprised of stocks, bonds, and money market instruments. The account value of variable annuities can go up or down based on market fluctuations. Your contributions and earnings are not guaranteed; they depend on the performance of the underlying investment options. If the funding options you choose for your annuity perform well, they may exceed the inflation rate or fixed annuity returns. If they don’t perform well, you may lose not only any earnings you’ve made, but even some of your contributions.

Some variable annuities offer, in addition to a range of funding options, a fixed account option that guarantees both principal and interest, much like a fixed annuity. A fixed account option can give you the security of allocating some of your premium payment more conservatively while still taking advantage of market potential. Again, the guaranteed rate is based on the claims-paying ability of the issuer.

Variable annuities also allow you to transfer money from one funding option to another without triggering a taxable event. In other words, if you transfer money to a different funding option within your variable annuity, you will not have to pay federal income taxes on any earnings you have accumulated at the time of transfer. Income tax free transfer means you can re-allocate money to suit changing investment goals (e.g., due to life events) without worrying about income tax burden.

Fixed and Variable Annuity Expenses
If you withdraw money from an annuity, or cash it in early to buy another annuity, there may be a surrender fee (or withdrawal charge). Surrender fees are usually highest if you take out money in the first few years of an annuity contract. In addition to surrender fees, withdrawals made prior to age 59 1⁄2 may be subject to a 10 percent tax penalty in addition to regular income taxes.

Fixed annuity contract expenses are taken into consideration when the company declares the periodic interest rate or determines the payment amount. Therefore, you will pay no maintenance and contract fees as you could with a variable annuity.

Variable annuities usually have more features and they have, therefore, more complex and higher fees than fixed annuities. For example, variable annuity fees may include an annual contract charge that covers administrative expenses and surrender fees. Variable annuities that guarantee a death benefit, or provide additional payout options, charge additional fees to cover these benefits.

In addition, a variable annuity has fees for the management and operating expenses of the funding options in which your money is invested. These charges pay for everything from the fund manager’s salary to brokerage commissions.

For a variable annuity, important information including investment objectives, risks, charges, and expenses will be explained in the prospectus. The prospectus describes in detail the variable annuity contract. Read it carefully before you invest or send money and be sure you understand exactly what your expenses will be.