A fixed annuity is the simplest annuity for consumers to understand. You simply receive a rate of return determined ahead of time. Many present the fixed annuity as a CD alternative. It is in the guaranteed principle category of investments, and is one of the safest investments for consumers available today.
There are two basic types of fixed annuities:
- Traditional Fixed. In the past this was the only type of fixed annuity available. The insurance company declares the rate up front and then will decide each year what to credit for the next year. The consumer has no way of knowing their rate in future years, and can only rely on the company’s history of renewal rates. If the insurance company decides to lower the rate in the future the consumer can really do nothing about it. This type of annuity is less desirable, and it isn’t being sold much anymore.
- Multi Year Guarantee. This is now the most common type of fixed annuity we are seeing in today’s market. It works very much like a bank CD, where an interest rate is declared up front and is guaranteed for that period. In today’s market we are seeing rates around 2% for 3 years, 3% for 5 years and 4% for 10 years. This is a good alternative for the CD investor with bank rates so low today, and it also builds tax deferred until funds are withdrawn. Depending upon one’s tax bracket, this can be very beneficial to the client, unlike a CD that is taxable each year even if the interest isn’t withdrawn.
Here’s something interesting with regard to terms: The reason they use the term fixed annuity isn’t that the rate itself is fixed, as most people would think, but all annuities have the option to annuitize or convert the lump sum to a guaranteed income stream instead. If you do annuitize a fixed annuity then the payment each year is fixed or the same, since the fixed annuity is backed by the safety of the insurance company which invests their portfolio in very conservative investments.
To Learn How a Fixed Annuity can be used in Your Portfolio, read the following post:
To Learn about Fixed Index Annuities check out: