What type of annuity has a varying rate of return based on mutual funds?

The correct choice is a variable annuity, which is designed to offer investors a return that can change based on the performance of selected mutual funds or other underlying investment options. Unlike fixed annuities that provide a guaranteed rate of return, variable annuities allow policyholders to invest in a variety of investment options, including stocks and bonds, which means the returns can fluctuate.

The appeal of a variable annuity lies in its potential for higher returns compared to fixed options, making it suitable for individuals comfortable with market risk who are looking for growth potential in their retirement savings. Additionally, variable annuities often come with features like death benefits and investment options that can align with individual risk tolerances and financial goals.

Fixed annuities, in contrast, provide guaranteed, stable returns and are not subject to the variability of mutual funds. Indexed annuities are tied to a stock market index but also include a protection element that limits losses. Immediate annuities begin paying out right away based on a lump-sum investment and do not involve varying returns linked to mutual funds.