Annuities – Broadening Your  Investment Horizons

While fixed annuities are considered to be instruments of relative safety, variable annuities, which include some degree of risk, are instruments with the growth potential necessary to outpace inflation. If you have decided an annuity fits your overall investment strategy, the decision as to whether a fixed or variable annuity is more appropriate hinges on your answers to several key questions:

Would you like to have the opportunity to choose investment options?

With a fixed annuity, the insurance company takes on all investment decisions; you have essentially traded decision-making for a fixed promise to pay. On the other hand, with a variable annuity, you choose from a menu of investment options (usually including funds of the sponsoring company) and have essentially exchanged a guaranteed result for the right to exercise investment direction. With a variable annuity, you bear a greater amount of risk; consequently, the cash value of a variable annuity contract is not guaranteed.

How much risk are you willing to accept to accomplish your investment goals?

Fixed annuities are considered low-risk investments, but you may sacrifice potential growth for safety of principal and certainty of return. Variable annuities are considered higher risk investments, offering less safety and certainty in the pursuit of potentially greater growth.

How important is diversification to your investment portfolio?

All investments carry a measure of risk, but you can reduce some of this risk through diversification.

What other factors should you consider?

First, a variable annuity grows on a tax-deferred basis. In contrast, periodic distributions from a regular mutual fund are subject to annual taxation, even if reinvested in additional shares. The annual taxation of mutual fund earnings means you might be required to pay additional dollars, or liquidate some shares, in order to meet the tax liability. Second, a variable annuity offers a lifetime payout option, while a mutual fund account does not. Finally, variable annuities provide a guaranteed minimum death benefit (guaranteed by the claims paying ability of the issuing insurance company), while mutual fund accounts do not.

While these three factors might appear to favor annuities, mutual funds do have their own advantages. Certain types of mutual fund accounts avoid early withdrawal penalties while, on the other hand, there may be some early surrender charges associated with annuity accounts. Also, overall fees may be lower with mutual funds, since annuity contracts involve mortality and expense risk charges associated with providing a death benefit guarantee and administrative services. Lastly, a variable annuity may offer only a limited number of investment options.

Evaluating the risks, and knowing your own risk tolerance, are important elements in the process of “trading off” risk and reward, and should guide the decision as to which investments are right for you. Fixed annuities, variable annuities, and regular mutual funds are not mutually exclusive. There is room for all three in a well-diversified portfolio. Taken together, they may provide an investment mix with a good combination of relative safety, growth potential, liquidity, and pay-out options. However, keep in mind that principal value and rate of return in both a variable annuity and a mutual fund will fluctuate according to market conditions. A prospectus, containing more complete information including charges and expenses, should always be read carefully before investing.

Copyright © 2004 Liberty Publishing, Inc. All rights reserved.
NASD Reference: FR2001-0416-0272

$100,000 Investment
Immediate Annuity


Deferred Annuity

$58,543 at 5.50%  (will grow to)

Monthly Income


Yr. 1 $61,763

Yr. 2 $65,160

Annual Income


Yr. 3 $68,744

Yr. 4 $72,525

for 10 years for which 81% is not taxedYr. 7 $85,161

Yr. 8 $89,845

Total Income before Taxes


Yr. 9 $94,787
Yr. 10 $100,000Original Principal

Please note that the illustration is based on a guaranteed interest rate of 5.50% for 10 years. Withdrawals from an annuity prior to age 59 1/2 may result in a 10% penalty tax imposed by the IRS. Annuities are not FDIC insured.

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