Fixed annuity: What are your options?

Before anything else, let’s first establish an understanding of what annuities are, and what a fixed annuity is in relation to that definition. What is an annuity?

Simply put, an annuity (also known as an immediate annuity) an exchange between an insurance company and an individual, or the buyer of the annuity. The buyer purchases the immediate annuity in a single deposit. The insurance company pays the buyer a monthly sum, or income, for the rest of the buyer’s life. In exchange, the buyer surrenders to the insurance company his rights to receiving his deposit back as a lump sum. 

What is a fixed annuity?

After an immediate annuity has made its first payment, it generally can’t be cashed in ever again. It can be arranged such that payments extend over a set number of years, or over your entire lifetime, or even over your lifetime plus that of another person.

There are two main kinds of annuities: a fixed annuity and a variable annuity. The type we’re concerned with here is the fixed annuity. A fixed annuity offers a guaranteed rate of return on the principal over the duration of the annuity contract. In this regard, fixed annuities are similar to bank Certificates of Deposit (CDs), and are often positioned or marketed as viable alternatives to bank CDs. The rate of return is actually competitive to those of CDs, with similar time frames but different tax treatments.

The key difference is that many fixed annuities do not actually provide a completely fixed rate of return over the entire duration of the contract. There is a guaranteed minimum rate and a first year “promotional” or “teaser” rate, which is usually higher than that for the remaining years of the contract.

Another key difference from a bank CD is that a fixed annuity contract often contains clauses that allow its buyer to withdraw a percentage of the interest (and some cases, also a portion of the principal) to be withdrawn early without penalties.

Also, annuities are not bank guaranteed. The insurance company issuing the fixed annuity guarantees the amount of the monthly fixed annuity payouts.

What are your options in a fixed annuity?

The simplest type of fixed annuity is the straight life or non-refund annuity (also known simply as a “life” annuity), wherein monthly payouts are guaranteed over the lifetime of one person, usually the buyer himself. This is most commonly availed of in retirement planning. Monthly payments from this type of annuity are always larger than those from other types.
Other types of fixed annuities basically extend the span or duration of a life annuity contract. Extended coverage reduces the monthly payout on a fixed annuity by as much as 5 percent to 15 percent.

There is the joint and survivor annuity, wherein payouts are extended over the lifetime of the buyer and the lifetime of a dependent in case of the buyer’s death. This is an ideal option for individuals with dependents such as a spouse, child or children.

A variation on this type is the certain and continuous annuity, where the payouts are extended over the lifetime of the buyer and the lifetime of his chosen dependent or beneficiary, but only for a set period. This period can be 5 years, 15 years, or more.

An installment refund annuity also confers monthly payouts to the buyer. However, in case the buyer dies before his full investment has been paid out to him, this type of annuity ensures that an amount equal to the remaining balance of the deposit continues on to a specified beneficiary.

NEXT ARTICLE >>