501 / What is a variable annuity?

For both types, the value of the contract (the cash value of the deferred contract or the size of the income payment of the immediate contract) varies with the performance of the “separate accounts” chosen (see Q 510).

Unlike fixed deferred annuities, variable deferred annuities do not guarantee either a minimum rate of interest or safety of principal. Indeed, the concept of “interest” can be misleading when applied to a variable deferred annuity, as the value of the contract does not vary by the addition of interest, but in the fluctuating value of the “accumulation units” purchased in the “separate accounts”. (For monies allocated to the “fixed account” of a variable deferred annuity, principal is generally guaranteed and a set rate of interest is credited each year).

Variable immediate annuities differ from fixed immediate annuities in that the size of the payments is not guaranteed but varies according to investment performance of the “separate accounts” (see Q 510).