Which type of annuity's payouts depend on the value of underlying investments?

Variable annuities are designed in such a way that their payouts fluctuate based on the performance of the investments chosen by the holder. In a variable annuity, the owner can allocate their premium payments among various investment options, often including mutual funds, stocks, and bonds. The value of the account can increase or decrease depending on market performance, which directly influences the amount of income the annuitant receives during the payout phase.

This characteristic makes variable annuities distinct, as they provide the potential for greater returns compared to fixed annuities, where the payout amounts are predetermined and do not vary with market performance. Immediate and deferred annuities, while relevant types of annuities, do not inherently relate to the concept of investment valuation impacting payouts. Immediate annuities start payments shortly after a lump sum is made, and deferred annuities involve a waiting period before payouts begin, but both structures can still involve fixed or variable elements. Therefore, in understanding annuities, the primary function of a variable annuity is its direct dependence on the success of the investments selected within the contract.