Fixed annuities vs. variable annuities: What they are, how they work

Fixed annuities offer a guaranteed rate of return and guaranteed amount of income. Variable annuities have returns that are dependent on the performance of underlying investments.

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Katherine MurbachEditor & Licensed Life Insurance AgentKatherine Murbach is a life insurance and annuities editor, licensed life insurance agent, and former sales associate at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and, as well as a principal writer covering personal finance at CNET.

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An annuity is a type of contract between you and an insurance company that guarantees you a stream of income in exchange for your payments — called premiums. Many people use annuities to ensure that they won’t outlive their savings, because annuities often guarantee you a set amount of income for life.

The money you put in an annuity grows depending on the type of contract that you buy. Two of the most common options include fixed and variable annuities. The main difference between a fixed and a variable annuity is that fixed annuities have a set rate and aren’t tied to market performance, whereas with variable annuities, your eventual payout depends on how your selected investments perform.

What is a fixed annuity?

A fixed annuity offers you a predetermined rate of return, which is set by your insurer. When you elect to start receiving income payments, you’ll also receive a fixed amount each time. You can choose how much money you want to contribute to the annuity and when you want to start receiving income payments. 

Generally speaking, fixed annuities are a predictable, low-risk way to supplement your income stream.

How do fixed annuities work?

You can fund your fixed annuity with one lump sum, or a series of payments. Either way, the money you contribute to your annuity grows at an interest rate set by your insurer. The rate is fixed for a set period — often a year — and your insurer sets a new rate each period. You’re guaranteed a minimum rate of return in spite of any changes. [1]

Fixed annuities can be immediate or deferred — meaning you can elect to have an income stream start immediately, or years down the road. You can choose a timeline that works for you based on your personal financial situation, and when you need the extra income.

There are different types of fixed annuities — like multi-year guaranteed annuities or single-premium immediate annuities — so how your annuity works will also depend on the specific subtype you purchase.

Learn more about how annuities work

What is a variable annuity?

A variable annuity allows you to invest your money in stocks, bonds, or market indexes through subaccounts. This means your funds will fluctuate with market performance — and the payments you’ll receive from your annuity will fluctuate, too. Because of the investment risk, variable annuities are considered securities, and regulated by the SEC and FINRA. [2]

How do variable annuities work?

Similar to fixed annuities, you’ll make payments toward your variable annuity so that your funds can accumulate. You can choose your payment schedule, or if you want to begin by contributing a large lump sum. Your funds will grow based on your selected investments. 

Eventually, you’ll receive income from your annuity, usually between three and 10 years after when you sign your contract. The payments you receive will fluctuate based on the performance of the underlying investments. Some insurers allow you to set a fixed minimum payment, but it ultimately depends on the terms of the specific annuity you purchase.

Learn more about other types of annuities

What are the main differences between fixed & variable annuities?

The biggest difference between fixed and variable annuities is the investment risk involved, which can impact how your funds grow and how much money you receive in payments.

Premiums & accumulation period

The accumulation period is when you contribute money toward your annuity. You can fund a fixed or variable annuity with either a lump sum, or in installments over time. Most of the time, variable annuities have longer accumulation periods than fixed annuities. 

The majority of variable annuities are deferred annuities, meaning your income stream doesn’t start until years in the future. This is so your funds have time to accumulate based on your investments (although performance is ultimately subject to market fluctuations).

Fixed annuities can either be immediate or deferred, since your money isn’t intended to grow or earn significant interest beyond your guaranteed minimum rate.

Annuitization or payout phase

Both fixed and variable annuities give you the opportunity to enter the annuitization phase, which is when you receive money from your annuity.

With fixed annuities, you’ll receive income in fixed installments that are guaranteed to stay the same. You’ll choose when you want to start receiving payments.

With variable annuities, the payments you receive will be influenced by the performance of your underlying investments.

In both cases, you can choose how long your payment phase will last. This could be 10 years, 20 years, or for life.

Can annuities be used as a collateral for a loan?

Withdrawals & surrender period

The surrender period is the time frame during which you can’t withdraw funds from your annuity without paying extra fees. Surrender periods typically apply to just deferred annuities — so they can apply to both fixed deferred annuities and variable annuities.

The length of your surrender period depends on your insurer — most last between three and 10 years. Many annuities have gradual surrender periods that have decreasing fees the longer you own your annuity. For example, you might pay a higher penalty for withdrawals in year one than you would in year five.

Returns or earning potential

Generally speaking, fixed annuities offer you modest, low-risk earning potential because your rate of return is set by your insurance company. Fixed annuities don’t expose your funds to market volatility, so they’re a fairly safe investment choice.

Variable annuities offer higher potential for returns, but also higher risk. You don’t know exactly how much you’ll earn, since your returns depend on investment performance.

If you’re looking for an option in between fixed and variable annuities, consider an indexed annuity. Indexed annuities allow your funds to grow based on a market index, but they typically come with safeguards that can protect you from market volatility. Your earnings may be limited at a certain point, but so are your losses.

Tax implications

A major benefit of annuities is tax control, which means you can plan for exactly when you’ll be taxed on your earnings. You’ll only pay taxes when you start to make withdrawals from your annuity. If you fund your fixed annuity with post-tax dollars (also called non-qualified funds), you’ll only pay taxes on the interest earned, rather than taxes on both the principal and the interest.

Learn more about non-qualified annuities

By contrast, if you fund your annuity with pre-tax dollars (also called qualified funds) — for example, with money from a 401(k) plan or an IRA — you’ll pay taxes on the principal and the interest when you take a withdrawal.

Learn more about qualified annuities

Because of this tax benefit, you’ll pay an additional 10% tax for early withdrawals if you withdraw funds while you’re under age 59 ½ [3] — regardless of the type of annuity you own.

Riders & other benefits

You can supplement your annuity contract with riders, which are add-ons that customize your contract and add certain benefits. Riders generally fall into two categories: living benefits and death benefits.

  • Living benefits impact the income you receive while you’re still alive. For example, you might want to add a guaranteed minimum accumulation value (GMAB) rider to a variable annuity to ensure you won’t lose money if your investments underperform. Or, you might want to add a cost of living adjustment (COLA) rider to a fixed annuity to help your payment amount keep up with inflation.

  • Death benefits guarantee a certain amount of money to your beneficiaries if and when you die. Death benefits can be guaranteed if you die within a certain number of years, or they can be guaranteed for life — such that no matter when you die, you know your loved ones will receive a certain amount of money.

The type of annuity you have doesn’t necessarily impact which riders you can add — it most often depends on the insurer you purchase your contract through.

Fixed vs. variable annuities: Comparing the main differences


Fixed annuity

Variable annuity


Installments or lump sum

Installments or lump sum

Accumulation period

Flexible — can be immediate or deferred

Most often deferred — at least three years


Fixed payment amount and schedule

Fixed payment schedule, payments may vary based on investment performance

Penalty for early withdrawals

Yes, 10% if you’re under 59 ½ years old

Yes, 10% if you’re under 59 ½ years old

Surrender period

Yes, for fixed deferred. Specific time frame depends on the insurer

Yes. Specific time frame depends on the insurer.

Investment options

None — fixed rate set by the insurer

Yes — funds grow based on your selected investments

Tax deferred



Ability to add riders



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Are annuities a good investment?

How to decide between fixed & variable annuities?

Your risk tolerance, income needs, and overall investment strategy can help you decide between a fixed and a variable annuity.

  • You could consider a fixed annuity if you’re looking for guaranteed returns and a predictable income stream. If you’d like to start receiving income payments within the next 12 months, an immediate fixed annuity would likely make more sense for you than a variable annuity.

  • You could consider a variable annuity if you have more of a tolerance for risk, and you’d like to be more hands-on with your investment selection. Since most variable annuities are deferred, you could consider this option if you need an income stream years down the line.

It’s important to keep in mind that regardless of the type of annuity you choose, these contracts are highly customizable. Working with a financial advisor and reputable annuities professional can help you find the type of contract that’s best suited to your needs.

Explore other annuity options


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  1. NAIC

    . "

    Buyer's guide to fixed deferred annuities: Fixed annuities

    ." Accessed May 23, 2024.

  2. FINRA

    . "

    Variable Annuities

    ." Accessed May 23, 2024.

  3. IRS

    . "

    Publication 575 (2023), Pension and Annuity Income

    ." Accessed May 23, 2024.


Katherine Murbach is a life insurance and annuities editor, licensed life insurance agent, and former sales associate at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.


Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and, as well as a principal writer covering personal finance at CNET.

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