Fixed Annuity Overview
If you’re thinking about investing in a fixed annuity, there’s no better time to learn about this type of investment. In this broad fixed annuity overview, we will cover exactly what fixed annuities are and how they work. We’ll also discuss the pros and cons associated with fixed annuities so that you can make informed decisions when buying an annuity.
What is a fixed annuity?
Fixed annuities are a type of investment product issued by insurance companies that provide guaranteed interest rates on your principal.
The rate is fixed and cannot change until the end of the term. The fixed term can range from a year to the entire length of the policy.
How do fixed annuities work?
Annuities are a type of insurance contract that allows you to use money you have saved to pay for retirement in exchange for a steady stream of income or a lump sum payment. When you buy an annuity, you agree to pay an insurance company a premium with a lump sum payment. In return, the company invests the money it receives into various financial instruments that produce interest. The longer your annuity is in accumulation, the higher your annuity’s payout will be when it comes time for retirement or death (or both).
Fixed annuity pros and cons.
Fixed annuities can be a good choice for people who want guaranteed retirement income. They offer a guaranteed rate of growth and a specified payout at the end of their term. However, there are some downsides to fixed annuities as well.
One major con is that they have low interest rates compared with other types of retirement savings accounts, such as stocks or mutual funds. You could get more growth and better interest rates by investing in equities, however those options increase your exposure to risk and loss of principal. Another con is that if you withdraw funds before you reach the age of 59 1/2, you may owe taxes on those funds (and possibly early withdrawal fees).
So how do we know whether to choose one type over another? It depends on what’s most important for our financial situation:
Learn what a fixed annuity is, how it works and the risks.
The fixed annuity is a type of insurance contract that allows an investor to put money into an account. The owner pays a lump sum, and then interest compounds on the investment over time. The owner pays no more premiums, but the returns are guaranteed at a certain rate of return.
The fixed annuity can be complicated to understand, so it’s important to consult a financial advisor before investing in one.
Types of fixed annuities: Deferred vs Immediate
Fixed annuities are typically split into two categories: immediate and deferred. With deferred annuities, payouts will not begin until the end of the contract term, typically 1-10 years.
Immediate fixed annuities start issuing monthly payments right away, and can be structured to pay out over a set amount of time or the investor’s life expectancy.
Fixed Annuity Performance
Fixed annuities give a solid, guaranteed growth, as long as they are not prematurely terminated. Premature termination can trigger a surrender charge, which is a fee that comes off the value of the policy. Deferred fixed annuities earn substantially more than other savings accounts, such as a money market or CDs, because of the compounded interest and tax deferral.
Fixed Annuity Features
All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life. More specific reasons to invest in fixed and immediate annuities:
- 1-10 Year Term – Fixed annuities are available for short, medium, or long terms. Longer terms yield higher rates.
- Single Premium – Fixed annuities involve a single premium, i.e. they require only one payment.
- Guaranteed Rate — The reason why fixed annuities are so popular, is because they carry a fixed interest rate for the number of years the contract states. This translates into a guaranteed receipt for people who need regular income.
- Very Low Risk — Money can only be lost if the insurance company becomes insolvent and your investment exceeds Annuity State Guaranty Limits.
- Retirement Income — Fixed annuities yield a monthly fixed income, which is invaluable for retirees. Secure monthly checks can keep your household expenses sorted, even after you retire.
- 3%-10% Return — Solid returns for essentially no-risk investment. Better than CDs, especially at longer terms.
- Lifetime Income — An optional lifetime provision guarantees paychecks for life. No worries about outliving your retirement savings.
- Life Insurance — Fixed annuities are like life insurance policies, for they come with the provision of death benefit for the remaining family members.
- Inflation Hedge — Fixed annuities are good inflation hedges as the amount you receive has some amount of interest included in it.
We hope this article has given you a better understanding of fixed annuities and their features. If you’re interested in learning more about these products, give us a call at 800-501-1984 to talk with one of our experts today!