- A fixed annuity credits a rate set by the insurer with principal protected from market loss; a variable annuity invests in subaccounts and the value moves with them.
- Variable annuities are securities requiring a prospectus and a securities-licensed seller. Fixed annuities are insurance products. That distinction drives everything else.
- Variable annuity cost is a stack — mortality and expense charge, administrative fee, subaccount expense, and any rider fee — and it is rarely presented as one number.
- Fixed annuity cost is real but invisible: it is built into the rate you are quoted rather than deducted as a fee.
- Both grow tax-deferred and both pay out as ordinary income, never capital gains. The tax treatment is identical and it surprises people.
Most people arrive at this comparison because someone has already handed them a proposal. So rather than another feature table, this page does the thing the proposal will not: it stacks the actual cost of each product into a single number, and it treats buy neither as a legitimate outcome.
The core difference in one paragraph
A fixed annuity credits a rate the insurance company declares and guarantees. Your principal does not fall when markets do, because the insurer — not you — carries the investment risk. A variable annuity allocates your premium to subaccounts you choose, which function like mutual funds inside an insurance wrapper. The value rises and falls with them. You carry the risk, and you pay the insurer for features layered on top.
Side by side
| Fixed annuity | Variable annuity | |
|---|---|---|
| Principal | Protected from market loss | Can fall with subaccounts |
| Growth | Declared rate, guaranteed for a term | Whatever the subaccounts return |
| Who bears market risk | The insurer | You |
| Cost | Built into the rate, not itemized | M&E + admin + fund + rider |
| Regulation | Insurance only | Security: prospectus required |
| Seller must hold | Insurance licence | Insurance and securities registration |
| Tax treatment | Identical — deferred, then ordinary income | |
| Backed by | The issuing insurer's claims-paying ability | |
How a fixed annuity works
You pay premium, the carrier credits a stated rate, and your account grows on a schedule you can compute in advance. The two variants that matter: a MYGA guarantees one rate for the whole term — three, five, seven years — making it the closest thing in the annuity world to a CD. A traditional fixed annuity declares a rate that can be reset annually, subject to a contractual guaranteed minimum that is often startlingly low. Ask which one you are being shown, and ask for the minimum in writing.
What backs the guarantee is the insurer's general account, which is why the carrier's financial strength rating matters more than any product feature. There is no FDIC here.
How a variable annuity works
Premium goes into subaccounts — equity, bond, balanced — held in a legally separate account insulated from the insurer's general creditors. That separation is why market risk sits with you: your money is not backing the insurer's promises, it is invested on your behalf.
Two rider families get sold alongside. A living benefit rider (GLWB) guarantees you can withdraw a set percentage for life even if the account depletes. Critically, it guarantees the income, not the account value, and the benefit base it calculates from is a bookkeeping figure you cannot withdraw. A death benefit rider guarantees beneficiaries at least a stated amount regardless of subaccount performance. Both charge annually, in every year, whether or not they ever pay out.
The cost comparison nobody publishes
Variable annuity content lists fees in the abstract and stops before adding them up. The layers, each disclosed separately in the prospectus:
Mortality and expense risk charge — the insurer's charge for its guarantees and expenses, taken against account value. Administrative fee — recordkeeping, sometimes a flat dollar amount, sometimes a percentage. Subaccount expense — the expense ratio of each fund you hold, exactly as with a mutual fund, and it varies by allocation. Rider charges — annual, and frequently assessed against the benefit base rather than the account value, which means the fee can grow even in a year when your account shrinks.
That last mechanic deserves a sentence of its own, because it is the one people discover late: a rider fee charged on a benefit base that is compounding at a guaranteed roll-up rate rises every year by construction, regardless of what your actual money did.
The only number that matters is the total. Ask the seller for all-in annual cost expressed as one percentage, in writing, for your specific allocation and your specific riders. It is a reasonable request, it takes them five minutes, and the reluctance or ease with which it is answered tells you something.
Fixed annuity cost is real but invisible. There is no fee schedule because the insurer's margin is built into the rate you are quoted — they invest at one yield and credit you a lower one. That is not a trick; it is how the product works. But it means "no fees" is a misleading way to describe a fixed annuity, and any comparison that scores it as zero-cost against a variable annuity's stacked percentage is comparing two things that were measured differently.
Surrender schedules and market value adjustments
Both types carry surrender charges — a declining penalty for taking more than the free withdrawal amount during the surrender period. Many fixed contracts add a market value adjustment on top, which moves your exit price up or down depending on where interest rates sit relative to your issue date. Two exit costs, not one, and the second has no fixed schedule you can read off a table.
The tax treatment is identical — and that surprises people
Both grow tax-deferred. Both pay out as ordinary income, never capital gains, regardless of how long you held the contract or what the subaccounts did. Both carry a 10% additional tax on gains withdrawn before 59½. Both follow the same gain-first ordering on withdrawals from non-qualified money.
This matters most for the variable annuity case. Money that would have been taxed at long-term capital gains rates in a brokerage account converts to ordinary income inside the wrapper. For a high-bracket investor, the deferral has to overcome that conversion before it is worth anything — and inside an IRA, where deferral already exists, it never does. The full mechanics are in our taxation guide.
Where fixed indexed annuities fit
Most people comparing "fixed versus variable" are actually being sold a third thing. A fixed indexed annuity is legally and economically a fixed product — principal protected, a bad index year credits zero — but its interest is linked to an index rather than declared directly, and limited by a cap, a participation rate, or a spread. It sits between the two on the risk axis and closer to fixed on the legal one. Our crediting guide runs one index year through every design so you can see what the levers actually pay.
Which one fits
You need income you cannot outlive. Either can do it, and a SPIA may do it better than both. Compare the contract's settlement rates against an outside quote before assuming the wrapper you own is the best route.
You want growth with a floor. This is the fixed indexed case, not the variable one. Understand the caps and the guaranteed minimums before the current-year numbers.
You have maxed out tax-deferred space elsewhere. This is the strongest legitimate case for a variable annuity: a high earner who has filled the 401(k) and the IRA, has a long horizon, and wants more deferral. It only works if the all-in cost is low enough that deferral beats the ordinary-income conversion — which rules out most contracts, but not all.
When you should buy neither. If the money might be needed inside the surrender period. If your essential expenses are already covered by Social Security and a pension. If the pitch leads with tax deferral for money that is already inside an IRA. If you cannot get the all-in cost in writing. And if you are being shown a variable annuity primarily as an investment rather than for a specific guarantee you have priced — a low-cost index fund does the investing part for a fraction of the cost and without the surrender schedule.
Questions to ask before you sign anything
What is the all-in annual cost as one percentage, for my allocation and my riders? What is the surrender schedule by year, and is there a market value adjustment? What is the guaranteed minimum rate, cap, or participation rate — not the current one? Is the rider fee charged against my account value or against the benefit base? What is the issuing company's current AM Best rating and outlook, and what is my state's guaranty association limit? Every one of these has a written answer that exists before you sign, and every one of them is harder to get afterward.
Frequently asked
Holding a proposal for one of these?
Send the illustration. We will stack the all-in annual cost into a single number, read the surrender schedule and any market value adjustment, and tell you what the rider actually guarantees rather than what it projects.
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