This type of annuity will typically offer a range of investment or funding options. These funding options may include stocks, bonds and money markets. Variable annuities are uncertain compared to fixed annuities. Your principal and the return you earn are not guaranteed, they depend on the performance of the underlying funding options. If the funding options you choose for your annuity perform well, they may exceed the inflation rate or fixed annuity returns. If they don't, you may lose not only prior earnings, but even some of your principal.
Some variable annuities offer a fixed account option that guarantees both principal and interest, much like a fixed annuity. That gives you the option of dividing your money between the low-risk fixed option and higher risk vehicles such as stocks, all under the umbrella of just one annuity. Variable annuities are usually sold on a flexible payment basis, as opposed to a one time lump-sum investment.
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