A Look At What Is A Fixed Annuity

What is a Fixed Annuity? An annuity is a contract from an insurance company to pay money in the future. The company guarantees a fixed rate of return, usually based on some underlying bond crediting rate. The contract is between the insurer and the owner of the annuity contract.
Annuities are used to provide a future benefit in the form of a stream of payments. These payments are made within one year, in the case of an Immediate Annuity. They may also take place at some future date, more than a year, as in a Deferred Annuity.
A Fixed Annuity differs from Variable Annuities because the insurer backs the interest rate earned. A Variable Annuity permits the owner to invest the payments in the market for a potentially higher return. This also means that the owner of a Variable Annuity has a substantially higher investment risk. As such, Variable Annuities are registered security products; fixed annuities are not. One fixed annuity, the equity indexed annuity is also not considered a security.
Fixed Annuities have two distinct phases: accumulation and annuitization. During the accumulation or build-up phase, payments are made and grow on a tax-deferred basis. When the owner decides to receive income, the annuity is "annuitize" or paid-out. Payout can take place all at once or over years based on the life of an annuitant. The annuitant is similar to insured in a life insurance policy.
Annuities are often compared to mutual funds and other investment products. This is a mistake because there are stark differences between the two. To start, Fixed Annuities are not investment products. They provide a way to defer income for a period of time. Their guaranty return is unique and not found with mutual funds that face market risk. A Fixed Annuity has mortality and expense charges that are not found in investment products.
An initial payment into an annuity can be made all at once or over a series of period. These are single pay and fixed pay annuities respectively. Annuities enjoy tax advantages during the accumulation phase and should not be used until age 59 and a half. Taking money out prior to that age for purposes other than a special need may result in penalties and fees. Many Fixed Annuity contracts have what are known as surrender charges. A surrender charge is a declining fee, based on the number of years money is held. They can be as high as 30 percent and last up to 20 years.
Fixed Annuities are useful in planning for such life events as retirement. They may also be used to distribute lump sum payments such as inheritances or lawsuits. These are special Fixed Annuities known as structured settlement annuities. A Fixed Annuity gives ease of mind to a person who is uncertain about the market. They tend to be competitive with bank certificates of deposit but again are unique products.
When considering the purchase of a Fixed Annuity contract you should consult a licensed insurance agent or financial adviser. A competent agent or counselor can provide you with comparative information and help determine the appropriate product. A Fixed Annuity may be valuable addition to your product holdings.