Fixed annuities are low risk investments that guarantee a monetary payout and a set rate of return.
What Is a Fixed Annuity?
Unlike variable annuities that provide inconsistent payout amounts based on a fluctuating financial market, a fixed annuity ensures the amount an annuity owner, or annuitant, 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.
How Do Fixed Annuities Work?
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
- 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 – If annuity owners are looking to secure their financial futures and those of their spouses, they may elect a 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
- 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, and remaining assets have the ability to transfer to a surviving beneficiary in the event the annuity owner dies.
- 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. Without a death benefit, funds will be surrendered to the issuing insurance company.
- Additional Fees – Like many annuity options, fixed annuities are subject to a number of fees and expenses. Some of the most common include commission fees, mortality and expense fees, and administrative fees.
- Surrender Charge – In addition to commission and management fees, insurance companies and the IRS will charge an early withdrawal fee if an annuitant withdraws more than 10 percent of the annuity value from the account before the disbursement term, or if assets are withdrawn before the annuitant reaches the age of 59 ½.
- Limited Flexibility – Once the contract is set, altering the terms can be difficult, specifically once it reaches the distribution phase. This leaves little-to-no window of flexibility in the event an annuitant needs additional funds for a medical or financial emergency.
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