By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Annuity Types: Fixed, Variable, and Fixed Indexed Annuities
Fixed annuities credit a set rate, variable annuities rise and fall with subaccounts, and indexed annuities credit capped index-linked interest.
Annuity Types: Fixed, Variable, and Fixed Indexed Annuities
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What is an annuity?
- An annuity is a contract with an insurance company that can accumulate money tax-deferred and later convert it to a stream of income.
- Immediate annuities start payments soon after purchase; deferred annuities accumulate first.
- Any promised payments depend on the insurer's claims-paying ability.
- Main types are fixed, variable, and fixed indexed, plus registered index-linked annuities.
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Full Guide
What is an annuity?
- An annuity is a contract with an insurance company that can accumulate money tax-deferred and later convert it to a stream of income.
- Immediate annuities start payments soon after purchase; deferred annuities accumulate first.
- Any promised payments depend on the insurer's claims-paying ability.
- Main types are fixed, variable, and fixed indexed, plus registered index-linked annuities.
How does a fixed annuity work?
- The insurer credits a stated interest rate for a set period, and the account value doesn't fluctuate with markets.
- Rates are fixed for the term, so they won't rise if market rates rise.
- Fixed annuities are insurance products regulated by state insurance departments.
How does a variable annuity work?
- You choose subaccounts, similar to mutual funds, and the account value rises or falls with their performance, including losses.
- Variable annuities are securities regulated by the SEC and FINRA and come with a prospectus.
- The base mortality and expense charge is often around 1.25% a year, before fund expenses and optional rider fees.
How does a fixed indexed annuity work?
- Interest is credited based partly on a market index, subject to caps, participation rates, or spreads that the insurer can change.
- Credited interest typically can't go below zero, but you give up part of the index's gains, and dividends are usually excluded.
- Registered index-linked annuities are different: they can lose value within a buffer or floor and are regulated as securities.
What fees and surrender charges apply?
- Surrender charges often apply to withdrawals during the first six to ten years and generally decline over time.
- Optional living and death benefit riders add annual costs.
- Commissions paid to the seller are built into the product and can be significant.
How are annuities taxed?
- Earnings grow tax-deferred and are taxed as ordinary income when withdrawn, not at capital gains rates.
- Withdrawals before age 59½ generally add a 10% additional tax on the earnings portion, with exceptions.
- Heirs don't get a step-up in basis on annuity gains.
- An annuity held inside an IRA or 401(k) adds no extra tax deferral, since the account is already tax-deferred.
Key takeaways
- Fixed, variable, and indexed annuities differ in how value is credited, who regulates them, and what they cost.
- Surrender periods, rider fees, and ordinary income taxation are the main trade-offs.
- Read the contract or prospectus and compare the total cost with alternatives.
- Rubric evaluates annuities in the context of a client's overall portfolio and goals; this article is educational, not a recommendation of any product.
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