What's an annuity and why should you have one?

Fixed Annuities

Many retirees choose fixed annuities for their predictability, stability and guaranteed stream of income. With a fixed annuity, the lifeinsurance company agrees to pay a fixed rate of income to the investor for life after a certain date. 

Moreover, the insurance company assumes the risk of the performance of the annuity's securities by directing the investment of the annuitant's principal into a portfolio of fixed-income investments. When the annuitant decides to begin the payout phase, the amount of income he or she receives is determined by a combination of the account's value and the investor's mortality expectancy.

Take a deeper look into the types of fixed annuities within the article, Exploring Types of Fixed Annuties which also details their advantages and disadvantages.

Variable Annuities

Variable annuities provide a slightly more complex trade-off to the investor: in return for assuming the performance risk of the underlying securities portfolio, the investor increases his or her potential for higher returns during an accumulation phase. 

Unlike a fixed annuity, a variable annuity has no guaranteed returns because the investor's principal is invested in one or more sub-accounts comprised of stocks, bonds and money market instruments. (However, most variable annuities do offer a sub-account that has a fixed rate of interest.) Nevertheless, the investor who wants to stay ahead of the rising cost of living will choose a variable annuity over a fixed one because the fixed annuity will lose its purchasing power over time. We will discuss sub-accounts and other features of variable annuities in the next section.

Read more: Fixed vs. Variable Annuities - Series 6 | Investopedia http://www.investopedia.com/exam-guide/finra-series-6/variable-contracts/fixed-variable-annuities.asp#ixzz4PXBS1ycK 
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