Fixed Annuities - The Basics

 

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Fixed Annuities - Understanding the Basics

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Fixed Annuity:

Fixed annuities are similar to a CD.  Where a CD is FDIC insured and guarantees a fixed rate of return for a period of time, a fixed annuity is not FDIC insured but has the guarantee from an insurance company to pay a fixed rate of return for a period of time.  A CD and a fixed annuity have early surrender penalties.  The CD early surrender period terminates upon maturity whereas the fixed annuity can extend for a period of years beyond the guaranteed period.  After the guaranteed period ends, a new guaranteed period begins and the rate may adjusts up or down according to prevailing market interest rates. 

Unlike a CD or mutual fund, annuities offer tax-deferred growth of earnings.  Distributions from an annuity are taxable as ordinary income on the amount in excess of your premiums (principal) invested.

Fixed annuities offer payout options which includes the option to annuitize and receive a guaranteed income for life or for a specific period of time.  This is know as an immediate annuity and is guaranteed by the insurance company.

Suitable Investor: 

Extremely risk adverse investors who do:

  • not want to risk loss of principal, 
  • not want to outlive their money, 
  • want a fixed guaranteed rate of return, 
  • prefer tax-deferred growth, 
  • have a longer time horizon and 
  • prefer capital preservation over appreciation.

Understanding the Process:

  1. Prior to Purchase:
  2. The Purchase:
  3. After Purchase:
  4. Distributions During Annuity Contract:
  5. Distributions due to Death of the annuitant:

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