Fixed Annuities – An Overview

Over the last two years, many investors have been looking for shelter from the storm that has been created on Wall Street. One financial product that has benefited from this turmoil is the fixed annuity. Definitely the tortoise, and not the hare in this race, it brings stability, and maybe some sleep to those restless nights.

What is a Fixed Annuity?

A fixed annuity is a financial product in which insurance companies guarantee a certain rate of return for your money. This guarantee is backed by the full faith and credit of the offering company (fixed annuities are not FDIC insured). The growth of a fixed annuity usually compares to CD rates at the time the annuity is purchased (thus the tortoise). You will often see an incentive offered where there will be a bonus rate for a certain period of time. For example, company ABC has a fixed annuity with a current rate of 3.00%, but if you invest $100,000.00 now, you will receive a premium bonus of 5.00% for the first year. The investor will receive 8:00% the first year and 3.00% the following years.

Annuities have a “surrender schedule” in which withdrawals from the annuity during this time will have a “surrender fee” based on the length of time the annuity is owned (fee schedules are waived in the event of the death of the annuity owner). Most annuities allow a certain amount to be redeemed during a twelve month period without incurring these penalties. Generally this is 10% of the principal or the interest earned. Annuities grow tax-deferred, so any distribution of earnings will be taxed as income.

Types of Fixed Annuities

The two main types of annuities are called immediate and deferred. These terms refer to the timing of the income stream of the investment. With an immediate annuity, the owner deposits the money and starts taking an income stream from the investment right away. Owners of a deferred annuity choose to leave the funds in the product and let it grow at the fixed rate stated on the contract of the annuity.

The amount received as a “pay out” from the annuity can vary based on the length of time the payments will occur, the value of the annuity and the age of the annuitant.

Typical Investor

Historically, fixed annuities have been popular with retirees looking for a specific rate of income each month/year. The “pay out” phase of the annuity can be for a set period of time (10 years, 20 years, etc.) or for the lifetime of one or two annuitants. If someone wanted to make sure that their mortgage would be taken care of at all times regardless of the market or any other outside factors, a fixed annuity is a good option for them.

As with all investments, it is imperative that the proper research is done in advance to make sure the product is a proper one. Consulting with a financial professional before choosing to invest in anything is always in the best interest of the individual.