The Definition of a Fixed Annuity, What is a Fixed Annuity
Fixed Annuity Definition
Before you know if a fixed annuity is correct for you, you have to know what it is. A fixed annuity is an insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract. The term is usually until the annuitant dies. The insurance company also guarantees both earnings and principal.
To make it easier to understand, consider a fixed annuity in the same tone as a CD. Like CDs, they pay guaranteed rates of interest which are, in many cases, higher than bank CDs. They also come in time frames like CDs.
Fixed annuities come in two types: deferred or immediate. The deferred annuity accumulates at regular rates of interest while the immediate kinds make fixed payments. The factors that decide the amount of these payments are your age and the amount deposited into your annuity.
For anyone wanting the convenience and predictability of a set payout, a fixed annuity is more than likely a safe bet. The set payouts give retirees a known income stream to supplement their other retirement income. This is a very helpful financial benefit.
Because fixed annuities pay guaranteed rates of interest, they are appealing to investors who are wary of the stock market’s ups and downs. Top that off with their low investment minimums – usually $1,000 to $10,000 – and couple it with the fact that the interest they pay escapes taxation until you pull it out, makes them very popular.
A fixed annuity can have rates fixed for a limited period. After that period, they can drop. For example, they can drop as early as the first year anniversary date. That means once the annuity is one year old, the rate can change to a new rate that called a declared rate. This can be higher or lower than the first year rate.
If you don’t like the new rates and want to withdraw your money early, heavy surrender charges could kick in and cut into your returns. These are called penalties. Always ask if your annuity has such penalties. And while you’re asking about penalties involved with annuities, go ahead and inquire about the fees that are associated with the specific product.
You should also know that once you decide to opt for fixed lifetime payments, those payments will not rise. They are fixed. So, if inflation heats up, your payment won’t rise to keep pace. You don’t have to be a financial guru to know the value of the money you receive will decline over time as inflation erodes the purchasing power of each dollar.
On the other hand, if you’re worried about not having enough money on which to retire, a fixed annuity can help you relieve that worry. A fixed annuity offers the stability retirees want since they don’t want to outlive their money. At the very least, they know they will have money to cover their fixed expenses.
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