Fixed vs variable annuity: how the risk, costs and rules differ

The core difference between a fixed and a variable annuity is who carries the investment risk. With a fixed annuity, the insurance company promises a stated interest rate and carries the risk of earning it. With a variable annuity, your money is invested in market subaccounts that you choose, and your account value rises and falls with them. Almost every other difference, from fees to regulation to how safe the money is if the insurer fails, follows from that one point.

Both are tax-deferred insurance contracts, both can be turned into a lifetime income, and both can carry surrender charges. Beyond that, they are built for different jobs. It is general education, not a recommendation to buy either.

The one-sentence difference, then the detail

A fixed annuity behaves like a long-dated savings product issued by an insurer. A variable annuity behaves like a portfolio of mutual-fund-style investments placed inside an insurance wrapper.

That distinction matters because it decides what you are actually paying for. With a fixed contract, the insurer earns a spread between what it makes on its general account investments and what it credits to you, so there is usually no visible annual fee. With a variable contract, you pay explicit charges for the insurance features and the underlying investments, and those charges are deducted whether markets go up or down.

For the full mechanics of each product, see our explainers on the fixed annuity and the variable annuity.

Side-by-side comparison

Feature	Fixed annuity	Variable annuity
Who bears investment risk	The insurer	You
How growth is determined	Declared or guaranteed interest rate	Performance of the subaccounts you choose, less fees
Can the account value fall from market losses?	No	Yes
Typical visible annual fees	Usually none; the insurer's margin is built into the rate	Mortality and expense charge, administrative fee, fund expenses, plus any rider fees
Primary regulator	State insurance departments	SEC and FINRA (as a security) plus state insurance departments
Disclosure document	Contract and state-required disclosures	Prospectus, plus the contract
Who can sell it	Insurance-licensed agent	Agent who is also a FINRA-registered representative
Where the money sits	Insurer's general account	Separate account (subaccounts); guarantees rely on the general account
State guaranty association coverage	Applies to the contract, up to state limits	Generally limited to guaranteed benefits backed by the general account, not subaccount values
Tax treatment	Tax-deferred; gains taxed as ordinary income when withdrawn	Same

The tax row is the one people expect to differ, and it does not. Neither gets capital gains treatment on withdrawal, even when the gains inside a variable annuity came from stock funds.

How each one grows

Fixed annuity growth

A fixed annuity credits interest at a rate the insurer declares. In a multi-year guaranteed annuity (MYGA), the rate is locked for the whole term, such as three, five or seven years. In a traditional fixed deferred annuity, there may be a first-year rate followed by renewal rates that the insurer resets, subject to a guaranteed minimum written into the contract.

The arithmetic is simple enough to do with our fixed annuity calculator. As an illustrative example only: a $100,000 premium credited at an assumed 5% a year for five years would grow to roughly $127,600 before any withdrawals or taxes. That figure is purely the result of the stated assumption. It is not a quote, and actual rates change constantly, so verify current rates with insurers before acting.

Variable annuity growth

A variable annuity has no declared rate. You allocate premiums among subaccounts, which typically include stock, bond, balanced and money market options. Your account value each day is the value of those subaccount units, after the contract's charges are taken out.

That means outcomes can range widely. Over a strong decade, a variable annuity can grow far more than a fixed contract. Over a weak one, it can be worth less than you paid in. Some contracts add a guaranteed minimum death benefit or a living benefit rider that promises a floor for certain purposes, but those guarantees usually cost extra and apply to a benefit base, not to the cash you can actually withdraw.

What each one costs

This is where the two products diverge most in practice, and where I see the most confusion.

A fixed annuity usually has no annual fee shown on the statement. The insurer's profit is the difference between its investment return and the rate it pays you. The main cost you will see is the surrender charge schedule, which applies if you take out more than the free withdrawal amount during the early years. Some fixed contracts also carry a market value adjustment on early surrender.

A variable annuity has several layers of explicit charges. According to the SEC's investor education materials, the common ones are:

• Mortality and expense risk charge, which pays for the insurance guarantees and the insurer's costs and profit;
• Administrative fees, either a flat annual amount or a percentage of the account;
• Underlying fund expenses, charged inside each subaccount, similar to mutual fund expense ratios;
• Rider charges for optional features such as enhanced death benefits or guaranteed lifetime withdrawal benefits;
• Surrender charges for early withdrawals, as with fixed contracts.

Added together, those charges can make a meaningful drag on long-term returns. The exact figures vary widely by contract, so the prospectus fee table is the document to read. Our article on annuity fees and surrender charges explains how to add them up.

How each one is regulated and sold

A fixed annuity is an insurance product. It is regulated by the insurance department in each state where it is sold, and the agent needs a state insurance licence.

A variable annuity is both an insurance contract and a security, because the buyer bears investment risk. That brings in a second layer of regulation. The contract must be registered with the SEC and sold with a prospectus, and the person selling it must be registered with FINRA as well as licensed by the state. FINRA has a specific rule on deferred variable annuity recommendations that requires the seller to have a reasonable basis to believe the product is suitable, including consideration of surrender periods, fees and whether the customer would benefit from features such as tax deferral and riders.

In practice, a variable annuity sale should leave a longer paper trail: a prospectus, a suitability or best-interest form, and often a disclosure of any exchange from an older contract.

How safe each one is

Safety needs separating into two questions: market risk and insurer risk.

On market risk, a fixed annuity's principal and credited interest do not fall when markets do. A variable annuity's subaccount values can fall, sometimes sharply.

On insurer risk, the picture is more nuanced. Fixed annuity money sits in the insurer's general account, so your protection rests on the company's financial strength and, as a backstop, the state guaranty association, which covers annuity values up to limits set by each state. Variable annuity subaccounts sit in a separate account that is legally insulated from the insurer's general creditors, so a failure of the insurer does not normally expose those investments to its debts. However, any guarantees layered on top of a variable annuity, such as a death benefit floor or a lifetime withdrawal guarantee, are paid from the general account. Those depend on the insurer's claims-paying ability, and guaranty association coverage for them depends on state law.

So neither product is simply "safer". The fixed annuity removes market risk but concentrates insurer risk. The variable annuity separates the investments from insurer risk but leaves you holding market risk. Our guide on whether annuities are safe covers ratings and guaranty associations in more detail, and you should check your own state's guaranty association for its current limits.

Where index annuities fit between the two

Many people shopping for a "fixed vs variable" answer end up shown a third option: the fixed index annuity. Legally it is a fixed annuity, regulated as insurance rather than as a security, and the principal is protected from market losses. The credited interest is linked to an index through a formula using caps, participation rates or spreads, so returns are limited on the upside as well as protected on the downside.

A registered index-linked annuity (RILA) is different again. It is a security, sold with a prospectus, and it can lose value up to a stated buffer or floor. If you are offered either, be clear which category the product falls into before comparing it with a plain fixed or variable contract.

How to decide which, if either, fits

I do not tell readers which product to buy, but I do suggest working through the same questions I would put to anyone weighing the two:

1. What is the money for? Money that must be there at a known date, or that supports essential spending, generally sits more comfortably with a guarantee. Money with a long horizon and room for volatility can tolerate market exposure.
2. Would you invest this in the market anyway? If so, compare a variable annuity's total annual cost against investing the same money in a low-cost taxable or retirement account. Tax deferral has value, but it has to be weighed against the extra charges and the ordinary-income treatment on withdrawal.
3. Have you used your tax-advantaged accounts first? Putting a variable annuity inside an IRA or 401(k) adds a second layer of tax deferral that does nothing extra. If an annuity is held there, it should be for its insurance features rather than the deferral.
4. How long can the money stay put? Both products usually carry surrender charges for several years. Check the schedule and the free-withdrawal allowance.
5. What guarantees are you paying for, and do you need them? Riders on variable annuities are the main source of complexity and cost. Read what each one actually promises, and against which value.

Running the numbers on your actual expected income can help too. Our annuity payout calculator shows how a lump sum converts to income under assumptions you set.

Whatever you decide, remember the free-look period. Most states give you a window after delivery of the contract to cancel and receive a refund, and the length and refund terms vary by state and by product type. Use it to read the documents properly.

Frequently asked questions

Is a fixed annuity better than a variable annuity?

Neither is better in general. A fixed annuity suits someone who wants a predictable, guaranteed rate and no market exposure. A variable annuity suits someone who wants market exposure inside a tax-deferred insurance contract and accepts higher fees and the possibility of losses. The right fit depends on the purpose of the money, your time horizon and what you already hold.

Can you lose money in a fixed annuity?

Not from market movements. You can lose money if you surrender early and pay a surrender charge or a negative market value adjustment, and in the rare case of insurer failure, your protection depends on the guaranty association limits in your state.

Why are variable annuities more expensive?

Because you are paying for several things at once: the insurance guarantees through the mortality and expense charge, administration, the investment management inside each subaccount and any optional riders. A fixed annuity's costs are mostly built into the rate rather than charged separately, which makes them less visible but not absent.

Can I switch from a variable annuity to a fixed annuity?

Usually yes, through a tax-free 1035 exchange from one annuity contract to another, provided the money moves directly between insurers. Check for surrender charges on the old contract, a new surrender period on the new one, and whether you would give up a death benefit or rider value that has built up.

This article is general education, not personal financial, tax or legal advice. Product terms, fees and guaranty association limits vary by insurer and by state, and rates change, so verify current figures with the insurer, your state insurance department and a qualified professional before acting.