When compared to a fixed annuity, a variable annuity has what distinguishing feature?

A variable annuity is distinguished from a fixed annuity primarily by the fact that investment risk is assumed by the purchaser. In a variable annuity, the returns are not guaranteed and fluctuate based on the performance of the underlying investment options chosen by the purchaser, such as mutual funds or stock portfolios. This means that while a fixed annuity offers a set interest rate and predictable returns, a variable annuity exposes the investor to market risk, allowing for the potential for higher gains but also the possibility of losses.

The nature of variable annuities allows for growth potential based on market performance, which attracts individuals looking for investment opportunities alongside the traditional benefits of an annuity. Understanding this risk aspect is crucial for investors to assess their risk tolerance when considering variable annuities compared to more stable fixed annuities.