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Retiring comfortably is the goal of many and with fixed annuities, this dream can be achieved but what is a fixed annuity?
When you consider a fixed annuity, you make specific payments to the provider who then guarantees to provide you with consistent returns on your investment regardless of market fluctuations.
Key Article Takeaways
When investing in an annuity, it is important to be aware of the liquidity, fees, and different types available. An overview of annuity basics and an analysis of fixed annuity contracts compared with other varieties can help when making decisions. Here is a guide to the key elements involved in a fixed annuity.
How the Fixed Annuity Works
Instead of opting for riskier types of investments, many individuals choose to invest in fixed annuities which guarantee returns on their contributions. This can be done with either one lump sum or multiple payments over an agreed period of time.
This period is referred to as the accumulation phase and withdrawals are then taken during the distribution phase. Most annuities are issued by insurance companies, but can also be purchased through banks.
A fixed annuity is an investment option that allows you to receive guaranteed payments for a predetermined number of years or one lump sum payment. Depending on your policy, the period of these payments can be designated as a certain number of years or even your lifetime. Note that the agreement restricts how long this is covered.
A fixed-income annuity is the ideal way to become your own pension provider. On a regular basis, often each month, these payments will come through like clockwork just like a paycheck.
Though one minor factor to note is that payments are subject to being taxed like any other form of income. For those who prefer knowing exactly how much they have in their budget every month, this option definitely comes in handy.
What are the Benefits of a Fixed Annuity?
Owning one or more fixed annuities can benefit individuals setting up retirement goals in a number of ways:
- Predictable Returns from Your Annuity: When considering a fixed annuity, it is important to remember that the interest rates are calculated using yields from life insurance companies’ investment portfolios. These investments usually consist of top-tier corporate and government bonds, and the insurance companies must abide by any promise they make in the annuity contracts with customers.
- Guaranteed Interest Rates: When the initial agreement reaches its conclusion, the insurer has the right to alter their rates according to a given formula or what they are making from investments. As a safeguard against dropping interest rates, fixed annuity contracts usually contain some form of minimum rate guarantee. In this way, those who have signed a fixed contract can be sure that their income will not plunge below a certain point.
- Tax-deferred growth: A fixed annuity is a great way to maximize the growth of your money due to its tax-qualified status; the earnings are able to accumulate without the owner being taxed until they make withdrawals or receive it as regular income. This deferment of taxation allows more capital to stay in the annuity and compound over time.
- Guaranteed Income When You Need It: At any time, an annuitant that owns a tax-deferred annuity may choose to convert it into an immediate annuity that guarantees income payments. The duration of such payouts can range anywhere from a set period of time to the entirety of the life of the one who holds the annuity.
Fixed Annuities versus CDs
Many investment and retirement planners find it difficult to choose between a fixed annuity and a CD. The difference between the two is very apparent when you consider your return on investment. Certainly, many remember the days when CDs were paying significant interest rates, but today annuities compete with CDs in every aspect you consider.
Certificate of Deposit (CD): Banks and credit unions offer CDs as an investment option. When you purchase one, you agree to leave your funds for an agreed time period. In return, the bank or credit union will credit your account with an interest rate that is normally higher than what is available in other savings accounts. On the downside, your money cannot be withdrawn until the end of the term without facing early withdrawal fees or penalties.
Fixed Annuities: In comparison to other forms of investment, fixed annuities are a type of insurance contract. Banks or other financial institutions offer them in order to guarantee a consistent income stream in the future for investors. People can invest in these accounts through monthly installments or with a one-time lump sum payment. Afterward, they will receive regular payments over a specific timeframe or until they pass away.
A significant distinction between certificates of deposit (CDs) and annuities is when returns are distributed and in what fashion. An annuity is usually paid out as a continuous stream of income while a CD will normally give you a lump sum payment upon maturity.
When considering saving for the future, annuities provide a reliable source of income for retirement, while Certificates of Deposit (CDs) are best for fulfilling short-term objectives.
Different Types of Fixed Annuities
| Type of Fixed Annuity | Benefit Summary |
|---|---|
| Immediate Fixed Annuities | Provides immediate, steady income, ideal for retirees needing to replace a paycheck. |
| Deferred Fixed Annuities | Offers income later in life with tax-deferred growth, helping to secure future financial needs. |
| Fixed Index Annuities | Potential for higher returns tied to market indices, with a guaranteed minimum return. |
| Single Premium Fixed Annuities | Simple, one-time investment offering secure, guaranteed returns. |
| Multi-Year Guaranteed Annuities (MYGA) | Fixed interest rate for a defined term, typically higher than CDs, with tax-deferred growth. |
Pros and Cons of Fixed Annuities
With any investment product, one must consider the pros and cons before making an informed decision. Cons of a fixed annuity include limited returns and teaser rates offered by some insurance companies, surrender charges, and commissions due to brokers and representatives.”
Advantages of Fixed Annuities
- Guaranteed return on investment
- Guaranteed income NOT based on market volatility
- Low minimum investment requirement
- The account is credited interest tax-deferred
- Flexible Payout Options
- Optional riders that protect the annuitant and beneficiaries
- Lower fees than other types of annuities
- Various optional riders
Disadvantages of Fixed Annuities
- Limit on returns and teaser rates offered by some insurance companies
- Surrender charges
- Mortality and expense fees
- Commissions due to brokers and representatives
- Non-flexible accumulation and withdrawal period
- Limitations or Inflation Protection
The Bottom Line
In comparison to Certificates of Deposit (CDs), fixed annuities tend to have higher interest rates. When it comes to deciding between these two investments, time is the primary factor that differentiates them. CDs are intended for shorter or medium-term goals while annuities work best as long-term retirement plans.
For more in-depth information about annuities and to get get quotes, call the insurance professionals at LifeInsure.com at 866-868-0099 during normal business hours, or feel free to contact us through our website 24/7,
