What Is a Variable Annuity?
A variable annuity is a type of annuity that is dependent on another financial entity’s performance. An annuity is a financial contract that protects financial assets and provides a steady income stream. Because of its extensive benefits and potential for long-term growth, lottery recipients and working professionals looking to invest in their nest egg frequently use annuities to secure their financial futures.
Variable annuities can potentially earn interest, but also incur risk, because they are partially invested in mutual funds, stocks, bonds or other financial markets. This option offers a potentially higher rate of return than the other major type of an annuity, a fixed annuity.
Both fixed and variable annuities offer guaranteed payout streams and a form of financial security, but they differ in how interest is accrued. Unlike a variable annuity, a fixed annuity guarantees the monthly or yearly payment an annuity owner (annuitant) receives is consistent. This annuity option offers a set interest rate of return, and does not fluctuate every pay period. With a variable annuity, however, the amount an annuitant receives every pay period may fluctuate because the interest rate depends on the fluctuating financial market.