Fixed vs. Variable Annuities — What Is the Difference?
When people start researching annuities, they quickly run into two terms — fixed and variable. Understanding the difference between them is one of the most important decisions you will make, because these two categories carry very different levels of risk, growth potential, and guarantees.
The Core Difference — Where the Risk Lives
At the heart of the fixed vs. variable debate is one fundamental question: who bears the investment risk — you, or the insurance company?
With a fixed annuity — whether that is a MYGA or a Fixed Indexed Annuity — the insurance company absorbs the market risk. Your principal is protected. You may earn less than the market in a great year, but you will never lose money due to market downturns. The guarantees live on the insurance company’s side of the contract.
With a variable annuity, the investment risk shifts to you. Your money is placed into sub-accounts that function like mutual funds and fluctuate directly with the market. In a strong bull market, your account can grow significantly. In a downturn, your account can lose real value — sometimes dramatically. The potential for higher returns comes with the very real possibility of losing a significant portion of what you put in.
📌 The simplest way to think about it: Fixed annuities protect your principal and offer predictable or capped growth. Variable annuities expose your principal to market risk in exchange for unlimited growth potential. The right choice depends entirely on your risk tolerance, timeline, and what you need your money to do.
Fixed Annuities — Stability and Protection
Fixed annuities come in two primary forms that we cover in detail on this site — the Multi-Year Guaranteed Annuity (MYGA) and the Fixed Indexed Annuity (FIA). Both share the same foundational promise: your principal is protected from market losses.
Multi-Year Guaranteed Annuity (MYGA)
A MYGA locks in a guaranteed interest rate for a set term — usually 2 to 10 years. Your growth is completely predictable from day one. There is no index, no cap, no crediting strategy — just a guaranteed rate that compounds year after year on a tax-deferred basis. Think of it as a more powerful alternative to a bank CD.
Fixed Indexed Annuity (FIA)
A Fixed Indexed Annuity earns interest tied to a market index like the S&P 500, subject to a cap rate or participation rate — but with a floor of 0%. In a down market year, you earn zero interest. You never go backwards. In a strong market year, you earn a portion of the gain up to your cap. It sits between the full predictability of a MYGA and the full market exposure of a variable annuity.
✅ Advantages of Fixed Annuities
- Principal is fully protected from market losses
- Predictable, stable growth with no downside surprises
- Tax-deferred growth until withdrawal
- Simpler to understand — no sub-accounts or fund management
- Lower fees — often little to no annual fees outside of optional riders
- Income Rider option available for guaranteed lifetime income
- Peace of mind — especially important near or in retirement
⚠️ Limitations of Fixed Annuities
- Growth potential is capped — you will not capture full market gains
- MYGA rates are fixed and cannot benefit from rising rate environments during the term
- FIA crediting can be complex depending on the strategy chosen
- Surrender periods limit full liquidity for several years
- Not ideal for aggressive long-term growth seekers
Variable Annuities — Market Exposure and Unlimited Upside
A variable annuity is an insurance product that functions more like a brokerage investment account than a traditional annuity. When you purchase a variable annuity, your premium is allocated into sub-accounts — a selection of investment options that typically include stock funds, bond funds, and balanced funds, similar to what you would find inside a 401(k).
The value of your account rises and falls with the performance of the sub-accounts you choose. In a strong bull market, a variable annuity can generate significant returns — potentially well above what a fixed annuity could offer in the same period. However, in a bear market or a prolonged downturn, the same account can lose 20%, 30%, or even more of its value. Unlike a fixed annuity, there is no floor protecting you.
Why Variable Annuities Exist
Variable annuities were designed for a specific purpose — to give investors a tax-deferred vehicle for market participation with the option to eventually convert their accumulated value into a guaranteed income stream. For younger investors with decades until retirement and a high tolerance for volatility, this combination can be appealing.
The Fee Question
One of the most important things to understand about variable annuities is their fee structure. Variable annuities typically carry multiple layers of annual fees that can significantly impact your net returns over time. These often include a mortality and expense fee (M&E), administrative fees, investment management fees on each sub-account, and fees for any optional riders you add. Combined, total annual fees on a variable annuity can range from 1.5% to 3.5% or more per year — fees that are deducted from your account value regardless of performance.
Variable annuities are securities products — they are regulated by the SEC and FINRA in addition to state insurance departments. An agent must hold a securities license (Series 6 or Series 7) in addition to a life insurance license to sell a variable annuity. Always confirm your advisor is properly licensed and that you fully understand the fee structure before purchasing.
✅ Advantages of Variable Annuities
- Unlimited growth potential in strong market environments
- Wide selection of investment sub-accounts to choose from
- Tax-deferred growth until withdrawal
- Optional riders can add income or death benefit guarantees
- Can be appropriate for long-horizon investors comfortable with risk
⚠️ Limitations of Variable Annuities
- Your principal is at risk — you can lose significant value in a downturn
- High annual fees (often 2–3%+) that drag on returns every year
- Complexity — sub-account selection requires active management
- Not suitable for people near or in retirement who cannot absorb losses
- Surrender charges and withdrawal rules still apply, same as fixed products
- Gains are taxed as ordinary income when withdrawn, not at capital gains rates
A Real-World Comparison
Two neighbors, Maria and Robert, both retire at age 65 with $300,000 to place into an annuity. Maria chooses a Fixed Indexed Annuity. Robert chooses a Variable Annuity.
Year 1 — Strong market (S&P 500 up 18%):
Maria earns up to her cap — let’s say 9%. Her balance grows to $327,000.
Robert’s sub-accounts gain 15% after fees. His balance grows to $345,000.
Year 2 — Market crash (S&P 500 down 25%):
Maria earns 0% — her balance stays at $327,000. Zero loss.
Robert’s sub-accounts lose 22% after fees. His balance drops to approximately $269,100. He has lost over $30,000 from his starting deposit.
The result: After just two years, Maria’s protected balance of $327,000 is $57,900 ahead of Robert’s $269,100 — despite Robert having the higher return in the good year. It takes Maria a smaller gain to stay ahead because she never gave anything back.
Side-by-Side Comparison
| Feature | Fixed Annuity (MYGA / FIA) | Variable Annuity |
|---|---|---|
| Principal Protection | ✅ Fully protected from market loss | ❌ Subject to market losses |
| Growth Potential | Guaranteed rate or capped index-linked growth | Unlimited — tied directly to market performance |
| Market Exposure | None (FIA uses index as a measuring tool only) | Direct — money is invested in sub-accounts |
| Annual Fees | Low to none (rider fees if elected) | High — often 2% to 3.5%+ per year |
| Tax-Deferred Growth | ✅ Yes | ✅ Yes |
| Lifetime Income Option | ✅ Yes — via Income Rider | ✅ Yes — via optional rider (adds cost) |
| Regulatory Oversight | State insurance department | SEC, FINRA + state insurance department |
| License Required to Sell | Life insurance license | Life insurance + securities license |
| Best Suited For | Pre-retirees and retirees seeking protection and predictable growth | Younger investors with long horizons and high risk tolerance |
Who Should Choose a Fixed Annuity?
A fixed annuity — whether a MYGA, an FIA, or an FIA with an Income Rider — is typically the right conversation for people who:
- Are within 10 years of retirement or already retired and cannot afford to absorb a significant market loss
- Want to protect a specific portion of their savings — such as a 401(k) rollover or an IRA — from market volatility
- Value predictability and peace of mind over maximum growth potential
- Are looking for guaranteed lifetime income that does not depend on the market
- Have already accumulated enough wealth and are now focused on protecting and distributing it rather than growing it aggressively
Who Might Consider a Variable Annuity?
A variable annuity may be worth exploring for people who:
- Are younger — typically under age 50 — with a long investment horizon ahead of them
- Have a high tolerance for market volatility and the ability to wait out downturns without needing access to the funds
- Have already maximized contributions to other tax-advantaged accounts like a 401(k) and Roth IRA and are looking for additional tax deferral
- Understand and have fully evaluated the fee structure and are confident the net return after fees justifies the product
Variable annuities have historically been one of the most over-sold financial products in the industry — often placed into accounts belonging to people near or in retirement who did not fully understand the market risk or the fee structure involved. If you currently own a variable annuity and are not sure it is still the right fit for your situation, a review with a licensed advisor is a smart step. In some cases, a 1035 exchange into a fixed product may make sense.
The Bottom Line
🛡️ If protecting your money is the priority
A Fixed Indexed Annuity or MYGA is almost certainly the better fit. You get tax-deferred growth, principal protection, and optional lifetime income — without the risk of a market loss wiping out years of savings.
📈 If maximum long-term growth is the priority
A variable annuity offers that potential — but so do low-cost index funds without the annuity fee layer. Make sure the tax deferral benefit outweighs the cost before committing.
♾️ If guaranteed lifetime income is the priority
A Fixed Indexed Annuity with an Income Rider provides a guaranteed paycheck for life — with principal protection underneath it. This is the choice most retirees in the Rio Grande Valley find the most peace with.
The right annuity is always the one that matches your actual goals, your timeline, and your honest comfort level with risk. That conversation is best had with a licensed advisor who has no stake in pushing you toward one product over another — just the right product for your situation.
Not Sure Which Type of Annuity Fits Your Situation?
I work with families across Brownsville, Harlingen, McAllen, and the entire Rio Grande Valley to help them compare annuity options honestly — with no pressure and no agenda. Whether you are starting from scratch, rolling over a 401(k), or reviewing an existing annuity you are not sure about, the conversation is always free.
📞 Call or text: 956-455-1313
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