There are several different types of annuities available for investors. Each one has different features and meets different investment needs.

The two major types of annuities are fixed and variable.

A fixed annuity offers a fixed rate of return over a period of years, while a variable annuity’s rate of return changes, depending on how well sub accounts perform.

Variable annuities are more like mutual funds, in this way, but the two are not identical.

Some facts and misconceptions on different types of anuities.

1. The different types of annuities each have their own benefits and drawbacks. One is not better than the other unless you have a specific reason for wanting to buy a particular type of annuity. Fixed annuities will give you a steady return and allow you to easily see how much you will need to save for retirement. Variable annuities offer you the chance to earn a high percentage of return while carrying more risk to your principal.
2. Fixed annuities are a class of annuity that offers a guaranteed rate of return for a period of time. This rate can change after the guarantee period. In some cases these annuities also offer a bonus rate for the first year, which is higher than most rates, but this rate drops to a lower rate after that time period. A variable annuity has no guarantee rated; the annuity earns interest on sub accounts which can be tied to stocks, bonds or a mixed bag of investments. When these investments perform well, the annuity earns a percentage based on their performance. You can lose money on a variable annuity. In addition, there are several more kinds of annuities like immediate annuities, which begin to pay you cash right away or within 30 days of your investment. Equity Index Annuities earn interest on the performance of a particular equity index like the S&P 500. When it performs well, so does your annuity.
3. There are many risks when choosing one type of annuity over another. If you decide to go the safe route with fixed rate annuities, you stand the risk of missing your chance for larger returns. If you choose variable annuities, you risk losing principal and missing out on the safety of at least earning some interest on your investment.
4. An annuity allows you to earn tax-free interest that grows without penalty so you can plan and save for your retirement. The different types of annuities allow you a mixed bag of options so you can achieve your financial goals in the way you are most comfortable. If you are only seeking the safety of tax-free growth with steady interest every year that rivals a money market account and even CDs, there are annuities designed just for you. You can purchase a competitive fixed rate annuity, a CD-type annuity (designed to be competitive with bank CDs) or buy a conservative variable annuity that invests in bonds and CDs. If you want large returns, you can risk your money on a variable account, and choose your own sub accounts to suit your own risk profile.
5. Fixed annuities feature a cut-and-dry rate of return that is spelled out from day one. You will earn a guaranteed rate for a set number of years, then have the option to renew at another guaranteed rate at the end of the contracted time. If you choose to surrender the annuity, you will pay a fee. You will also pay fees on every other type of annuity for death benefits, riders and more expensive options you may or may not need. A variable annuity allows you to choose sub accounts much like you would choose a mutual fund, to invest your money into. When these sub accounts (which are tied to stocks, bonds, CDs and other investments) perform well, you earn a percentage of their growth. Variable annuities also offer death benefits that allow your money to be passed on to your heirs, just as fixed annuities and other types of annuities do.
6. Annuities evolved from contracts that began as far back as the age of Shakespeare, when royalty and rich merchants sought a way to retain their wealth and guarantee an income. They used to make sense only for rich investors who could tuck money away and enjoy the tax-free interest. Today, annuities are a popular investment choice for those looking for a way to finance an ever-more-expensive retirement. They are now more competitive and appealing to all investors. Annuities now compete with traditional investment products like stocks, bonds, CDs and exchange traded funds, as well as index funds, because of the invention of sub accounts and other features.