A. There are two types of annuities: fixed and variable.
Variable annuities earn investment returns based on the performance of the investment portfolios, known as “subaccounts,” where you choose to put your money. Like any investment, the return earned in a variable annuity is NOT guaranteed. If the value of the subaccounts goes up, you make money. However, if the value goes down, you could lose money. Also, income payments to you could be less than you expected.
Fixed annuities earn interest and not "returns." This is an important distinction because investments returns could be positive or negative, interests are always positive. Cash value Life insurance and fixed annuities earn interest. Since there are no investment losses in fixed annuities, the use of the term “return” is wrong.
Unfortunately, mixing up these two distinct concepts is a common mistake made by people who don’t understand fixed annuities and who make their living selling risk-based investments.
Two Types of Interests
With fixed deferred annuities, the insurance company either calculates and determines the interest to be credited
a) based on the insurance company's earnings (for set or declared rate annuities) or
b) based on the positive performance of a market index (for indexed annuities).
The National Association of Insurance Commissioners (NAIC), which regulates fixed annuities, considers both products FIXED annuities. All fixed annuities, including indexed rate and declared rate annuities, guarantee you will not suffer losses.