What Is a Fixed Annuity?

By Compuquotes Team on November 21st, 2008


A fixed annuity is the most common type of annuity. Basically, you give an insurance company a lump sum of money (either saved over a period of time or in one lump sum) and in exchange, the insurance company pays you a fixed income each month for a specific period of time. If you are doing a single premium immediate annuity (one lump sum payment of funds to the insurance company) the payments begin right away. If you are doing a single premium deferred annuity (monetary payments to the insurance company over a period of time, sort of a savings account, or can also be done as a lump sum payment) the payments begin at the date of your choosing (usually your retirement date) or a date chosen based on when your savings period is over.

Fixed annuities are a great product to use as a tax-deferred investment or a way to have a lump sum of money converted into a steady stream of income. For fixed annuities, the monthly payments are the same throughout the term of the annuity, regardless of how the investment markets are doing or inflation. With a fixed annuity, you have to choices for the payment stream:
• Fixed period - you can choose a specific period of time, for example 15 years. This means that you will receive payments for 15 years, and if you pass away before that time period, your beneficiaries will receive the payments until the final payment date. These payments are usually comprised of both interest and principal. If you chose deferred payout instead of immediate, the investment grows as years pass, with taxes deferred on the growth.
• Annuitize - This means that you want to receive payments until your death. When you pass away, your beneficiaries do not receive anything. It doesn't matter if the payments are made for one month or 50 years - they stay the same until the investor passes away. This is optional for investors and is most often sold by insurance companies that are experienced in determining how long an investor (or sometimes known as the annuitant) will live through statistical probability.

Fixed annuities sometimes have surrender provisions that will prevent you from withdrawing money from the annuity for five, 10 or some other number f years. While it depends on the insurance company, some allow you to access your investment, which usually means that the investor can withdraw up to 10 per cent of the principal. Some annuities will have hardship clauses that allow you to withdraw the investment with no surrender charges in some situations, so be sure to discuss this fine print with the insurance agent or broker before signing on the dotted line.

Annuities offer a distinct stability to your retirement years. However, you should compare fixed annuities to other annuity programs and other retirement programs to be sure that you are getting the right product for you - one that will fit your needs now, and in the future when you retire. The whole purpose of choosing a fixed annuity is for guaranteed monthly income when you've retired, so be sure to ask your agent or broker about anything that you are unsure of.

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