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Fixed Annuity Overview and FAQ

Fixed Anuities offer many benefits that investors today are taking advantage of.  They are ideal investments for those who may still be working and are saving for their retirement, a college fund for children or some other purpose where tax deferral is important.

Low rates on money markets, pass book saving accounts and CD's have increased the popularity and sales of fixed annuities. 

Many investors that left the stock market due to it's volatility and risk have also turned to fixed annuities.

Fixed annuities provide liquidity through liberal withdrawal provisions and loans. Certificates of Deposit buyers do not get liquidity. CD buyers do not get interest withdrawals, accumulation withdrawals, and income options fixed annuities can offer. 

Fixed annuities also offer flexible premiums, nursing home waivers and long term guarantees that are not available with other investment alternatives.

Guaranteed Income - Over 80 % of people surveyed in a recent study indicated they purchased a fixed  annuity as a cushion in case they survived beyond their life expectancy. Those surveyed indicated that they thought a fixed  annuity would help them avoid becoming a financial burden to their children. 81% expected to rely on their fixed annuity contracts as a source of retirement income and 70% intended to be able to fall back on their fixed annuity in the event that their investments perform poorly.

Fixed Annuity Benefits

Tax deferral is the main reason why people invest in fixed annuities. Interest earnings inside of fixed annuities grow and are not taxed until money is withdrawn. The tax deferral status is unique and not offered by stocks, bonds, mutual funds and certificates of deposits. 

One of the most significant tax benefits of fixed annuities is control over the payment of taxes on your investment. Interest earned  inside of a fixed annuity grows tax deferred until money is withdrawn. 

When a partial withdrawal is made or if an annuity income is taken such as an income for life, for a stated period ,or stated amount you will  pay taxes on the interest portion of the withdrawal.

Think of a fixed annuity as an investment that will allow you to plan when you will pay taxes on your investment. Many people decide to begin taking withdrawals from their annuities when they retire since they will generally be in a smaller tax bracket. That will allow you to keep more of your investment income and pay less in taxes.

Example of Tax Deferral

Consider the following example that illustrates the power of tax deferral. Today investor (a) has 50,000 which will be invested in an annuity for twenty years earning 7%. Investor (b) who is in a 28% tax bracket invests the same amount at the same rate in a taxable investment over the same period. Investor (a) managed to save approximately $30,153 in taxes by deferring the tax on their initial investment of $50,000.

Principal  Protection 

The principal in fixed annuities is usually guaranteed 100%. This guarantee is not offered with stocks, bonds or mutual funds. Fixed annuity contracts also offer minimum guaranteed rates of interest, usually 2% or more that are in fact guaranteed for the life of the contract no matter what. This is the minimum guarantee that the states require on each and every fixed annuity contract. Minimum interest rates do vary from state to state. Mutual funds and online brokerage accounts do not offer investors  minimum guaranteed rates of interest on their investments. 

Competitive returns

Many companies currently  offer fixed annuities that base the interest credited to the annuity to indices such as the Dow Jones Industrial Average, NASDAQ 100, S&P500 and the US 10 year bond. The returns of these indices over a period of time are greater than those found in regular passbook savings accounts and money market accounts.

Income Options

Once a person decides to withdraw money from a fixed annuity contract they may do so using several income options. When a method is selected the insurance company guarantees the income payment(s) . If a lifetime option is chosen for example, the insurance company guarantees to make payments for as long as you live. Period certain settlement options are payments for a specified term usually ten or more years if the lifetime income selection is undesirable.

Fixed annuity contracts also offer minimum guaranteed rates of interest, usually 2% or more that are in fact guaranteed for the life of the contract no matter what. This is the minimum guarantee that the states require on each and every annuity contract. Minimum interest rates do vary from state to state. Mutual funds and online brokerage accounts do not offer investors  minimum guaranteed rates of interest on their investments. 

Annuity income options are also guaranteed. If an investor is going to use a fixed  annuity for retirement and wants it to provide payments for life, the company is obligated to make these payments-without exception. The same applies for payments for a fixed period, fixed amount or payments continuing to survivors such as a spouse. The company guarantees to make payments as specified by your instructions contained in the contract.