Fixed and variable annuities differ in the way they generate earnings and also in the amount of risk involved.

When you buy a fixed annuity, the insurance company guarantees you an interest rate for an initial period of time. At the end of this initial guarantee period the insurance company will declare a renewal interest rate and another guarantee period. In addition, most fixed annuities have a minimum interest rate that is guaranteed for the life of the contract. Fixed annuities typically appeal to investors who feel more comfortable knowing exactly how much their money is earning.

With a variable annuity, you have added control over your investment dollars. You allocate your funds among a variety of investment options with objectives ranging from aggressive to conservative (insurance companies call these sub-accounts). Your rate of return is tied to the performance of the underlying investments of the sub-accounts. Variable annuities typically appeal to investors who are willing to accept a higher level of risk in return for higher growth potential.

Both fixed and variable annuities offer you the wealth-building combination of compound interest and tax deferral. When your earnings are not eroded by taxes each year, they compound faster. Faster growth of your money means more spendable income for you in the long run.