How does a fixed annuity differ from a variable annuity?

A fixed annuity is designed to provide a guaranteed return on the investment, offering predictable, stable payouts that are not subject to market fluctuations. The principal and interest are typically guaranteed, which means that the annuitant knows exactly how much they will receive during the payout phase.

In contrast, a variable annuity does not guarantee the amount of its payouts, as the income depends on the performance of the underlying investment options, which might include stocks, bonds, or mutual funds. As a result, the payments can fluctuate based on market conditions, creating potential for both increased returns and risks of lower payouts.

This fundamental distinction in how each type of annuity handles investment risk and payout structure is what makes option B the correct answer. Fixed annuities provide security with predictable payments, while variable annuities carry a level of investment risk that can affect the income received. The other options do not accurately capture the core differences in the mechanics of how fixed and variable annuities operate.