Fixed Annuities
Fixed annuities are low risk investments that guarantee a monetary payout and a set rate of return, providing consistent income you can rely on.
What Is a Fixed Annuity?
A fixed annuity is a financial contract that guarantees a rate of interest on any money deposited into the annuity account. This annuity type accrues interest over time on a tax-deferred basis, and provides a consistent income stream.
Unlike variable annuities that provide inconsistent payout amounts based on a fluctuating financial market, a fixed annuity ensures the amount an annuity owner receives is consistent. This investment tool is considered low risk because there is a set interest rate unaffected by the performance of outside investments like mutual funds, stocks and bonds.
Key Benefits:
- Guaranteed rate of return for contract duration
- Tax-deferred growth during accumulation phase
- Steady income stream for life or set period
- Protection from market volatility
- Optional death benefit for beneficiaries
How Do Fixed Annuities Work?
Fixed annuities guarantee a rate of return for the duration of the contract, and a steady income stream for the remainder of your life or for a set period of time.
After paying for the principal using a lump sum or monthly premium payments, the principal will grow tax-deferred during the accumulation phase of the contract. This amount plus interest will later be disbursed as regular monthly, quarterly or annual payments.
Fixed annuity assets are not taxed until withdrawn from the account. If over the age of 59½ years old, annuitants can make withdrawals of up to 10 percent of the annuity account value without penalty. If under the age of 59½, early withdrawals will be subject to a 10 percent IRS penalty.
Fixed annuity disbursements can be deferred or immediate. In a fixed deferred annuity, the payout is disbursed later in life and allows for the investment to accrue interest until the distribution phase. A fixed immediate annuity disburses income immediately after purchase for a set period of time.
Fixed Annuity Types: Life vs. Term Certain
There are two main types of fixed annuities. While both options provide a guaranteed payout, they differ in how long the distribution phase lasts.
Term Certain Annuities
Term certain annuities disburse a set amount of income through a specified date. However, this annuity option does not account for the annuitant's current health condition or life expectancy. If the annuitant dies before the end of the set term, all remaining assets are surrendered to the insurance company. If the term ends before the annuitant's death, all disbursement will end.
Life Annuities
Life annuities provide a set amount of income until the annuity owner dies. If an annuitant dies before receiving the entire value of their annuity investment, they risk losing the remainder of their principal if a beneficiary is not selected.
Single-Life Annuity
This annuity option guarantees a payout until an annuitant's death. It is only valid for one person, and typically offers a higher payout rate than a joint-life contract.
Joint-Life Annuity
This annuity option ensures that if an annuity owner dies before all assets have been disbursed, the surviving spouse or beneficiary will receive the income until their death.
Fixed Annuity Pros and Cons
As with any financial investment, fixed annuities have their share of benefits and risks to consider.
Pros
Guaranteed Income
Fixed annuities ensure a steady stream of income payments for a designated amount of time. The payout amount will not fluctuate based on the financial market.
Tax Deferred
Annuity assets from this investment grow tax deferred, meaning any contribution to the annuity account can accrue interest tax free until the distribution phase.
Death Benefit
In the event an annuity owner dies before the end of the contract term, the annuitant can elect to have a spouse or beneficiary receive the remaining funds.
Cons
Additional Fees
Fixed annuities are subject to a number of fees including commission fees, mortality and expense fees, and administrative fees.
Surrender Charge
Insurance companies and the IRS will charge an early withdrawal fee if an annuitant withdraws more than 10% before the disbursement term or before age 59½.
Limited Flexibility
Once the contract is set, altering the terms can be difficult, leaving little flexibility in the event of a medical or financial emergency.
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