Why Fixed Annuities?

With a guaranteed interest rate, fixed annuities can also provide a protected and predictable stream of income to owners. This also means potentially higher returns than other safe money alternatives like certificates of deposit (CDs), money market funds and even some bond funds. Due to these guarantees, fixed annuities can also be a great option for people who only have a limited amount of money saved for retirement and want to benefit from moderate principal growth and preserve the option to receive regular income. In addition, because of the relatively straightforward nature of the contract, fixed annuities have few to no fees, providing a potentially better value.

Variable annuities, in contrast, are inherently riskier. With a fixed annuity, the insurance company is taking on the investment liability, but with a variable annuity, that liability lies with the policyowner. There is also no automatic guarantee that the principal payment will be fully protected since the performance of a variable annuity is directly tied to the performance of investment funds, making it more volatile.

Variable annuities also come with more fees, which may not be as much of an issue when the market is performing well, but when it isn't, having to pay a series of fees while also losing value may be too costly for some policyowners. Additional guarantees may be added to a variable annuity, but those, too, typically come with additional fees.

Because variable annuities are investments, policyowners typically review more documentation, need more specialized advisors or investment advice, and require a higher degree of investment understanding.

Who Needs What?

Individuals who would benefit the most from fixed annuities are:

• In retirement and cannot afford to suffer a loss to their retirement funds, or are five to 10 years from retirement and won't have the time to recover from a stock market loss.
• Seeking an alternative to CDs, money markets and bond funds with potentially better and more consistent yields.
• Interested in a constant-stream-of-income option that would resemble pension payments.

Those who would benefit the most from variable annuities are investors who can handle the risk and have more time to bounce back from a down market.

Guaranteed Income

Fixed annuities and variable annuities are two distinct products that have sometimes been lumped together, causing confusion and hesitation.

Separately, either could serve as a beneficial component to a diversified portfolio, depending on the needs of the annuity purchaser.

For clients who need more guaranteed income now or in the future, however, fixed annuities are a safe option, provide interest rates superior to most CDs and money market accounts, defer taxes and provide a steady income stream.

Paul Garofoli, FLMI, is a regional sales director of individual annuities at The Standard.