Fixed Annuity

• A fixed annuity is one that pays a fixed interest rate on the money you invest in the premium. Your principal is not "at risk," meaning that you don't have to worry about a fixed annuity decreasing in value because the stock market drops. Instead, the insurance company invests the money in long-term investments that it believes will provide enough income to pay you the interest rate guaranteed in your annuity contract.
  
  

Variable Annuity

• With a variable annuity, you invest the premium in sub-accounts, which function like mutual funds. The value of your annuity is determined by the value of the underlying sub-accounts and your investments in them. The principal in a variable annuity is at risk, meaning that you can lose money in a variable annuity. If you purchase a variable annuity, you may be able to purchase a rider that guarantees your income will be based on the amount you contribute instead of the actual account value if it falls below your original premium.
  
  

Commissions and Fees

• For both fixed and variable annuities, the commission is paid by the company offering the annuity contract, not the individual purchasing the annuity. The financial adviser recommending this annuity should tell you who is responsible for paying the commission.
  
  Most fixed annuities do not have fees attached to them unless you purchase a rider of some sort. Variable annuities have mortality and expense charges, along with fees for each sub-account. Riders will also cost an annual fee. Fees are subtracted from your earnings. Most annuity contracts permit a certain percentage of your contract to be withdrawn each year without paying a penalty for withdrawing the funds early, but any amount over this will be subject to a surrender charge. Surrender charges can vary between annuity carriers.
  
  

Considerations

• If you do not want to lose any of your principal, a variable annuity may not be a suitable investment choice for you. A financial adviser should leave you with plenty of accessible, "liquid" income. Putting your entire retirement nest egg into an annuity can result in substantial surrender charges if you need to break the contract for any reason.