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Fixed Annuities

 

A fixed annuity is generally the most conservative, safest type of annuity. Your principal investment is guaranteed for the life of the contract.

Fixed annuities are often positioned similar to bank CDs and usually offer a comparable rate of return. Fixed annuities have a number of advantages over CDs including:

  • The money you invest in a fixed annuity is allowed to grow tax-deferred. You do not have to pay taxes on income or gains until you begin withdrawing it.
  • The annuity contract may have additional benefits, such as a death benefit payable to a nominated beneficiary in the event of your untimely passing.
  • Unlike most CDs, there is usually a provision in the contract to allow a percentage of the interest and/or principal to be withdrawn early and without penalty (typically this is limited to 10% of the value of the annuity, including accrued interest).

Understanding Fixed Annuities

There are a number of key terms you should understand before comparing fixed annuities:

  • Introductory Rate

    This is the interest rate you earn in the first year of the annuity contract. If offered, this rate is typically higher than the base rate and is guaranteed by the insurance company. Similar to a bonus rate, which is the amount you earn over and above the base rate.

  • Base Rate

    The interest rate you earn in the second and subsequent years of the annuity contract. The amount of the based rate depends on the type of annuity contract and may or may not be guaranteed by the insurance company (although it can never be reduced below the guaranteed minimum rate). If the base rate is not guaranteed, the insurance company may have discretion to lower (or raise) the base rate each year. The base rate may also be a floating rate based on a market index.

  • Guaranteed Minimum Rate

    The lowest rate you could earn. The insurance company cannot lower the base rate below this amount.

  • Guarantee Period

    A specified period of time for which the insurance company pays a guaranteed fixed rate of interest.

Types of Fixed Annuities

There are five main types of fixed annuity:

  1. Single-Year Guarantee Fixed Annuities

    The interest rate you earn in the first year (the introductory rate) is guaranteed by the insurance company. The insurance company may raise or lower the rate in each subsequent year. Unlike a CD, this type of annuity does not have a fixed rate of return over the life of the contract, although the insurance company cannot reduce the below the guaranteed minimum rate. In practice, the interest rate you earn on this type of annuity tends to be lowered each year.

  2. Multi-Year Guarantee Fixed Annuities

    The interest rate you earn is guaranteed by the insurance company for a specified number of years, usually 2 to 10 years. With a guaranteed return, this type of fixed annuity is the most similar to a CD and provides the investor with a certain return throughout the guarantee period. This is the most popular type of annuity for conservative investors, having the features of a CD, but with added benefits including tax-deferred earnings growth.

  3. Market Value-Adjusted Fixed Annuities

    The interest rate you earn is fixed – it is not based on a market index – but this type of annuity has a special type of surrender provision that is market-driven. This provision is known as a market value adjustment (MVA). The MVA only applies in the event that the contract is surrendered before the MVA period expires.

    If you withdraw your money before the end of the MVA period, you may receive more or less than the accumulated value of your annuity account, depending on the movement in market interest rates. If current market interest rates are higher than they were when you entered the contract, the MVA will reduce the balance of your account and you will receive a lower amount. If market rates are lower than they were when you entered the contract, the MVA will increase the balance of your account and you will actually receive more. The insurance company is effectively sharing any gain or loss in its investment portfolio with you.

    The MVA period and the interest rate guarantee period normally expire at the same time. But some annuities have an MVA period that is longer than the interest rate guarantee period. It is recommended that you avoid any market value-adjusted fixed annuity with an MVA period that exceeds the guarantee period because it could be very costly to reallocate your investment if the interest rate is reduced below an acceptable following the end of the guarantee period.

    A market value-adjusted fixed annuity has the potential to provide higher interest rates than other types of fixed annuities. This type of annuity is best suited to individuals who are prepared to tolerate a small amount of risk in return for a potentially higher interest rate.

    If you surrender your contract early, in addition to the MVA, you may also be subject to an early withdrawal charge.

    The terms and conditions of each market-value adjusted fixed annuity are detailed in a prospectus, which will include a schedule of early withdrawal charges and an explanation of the market value adjustment calculation. You should understand the specific terms and conditions of an annuity before making a commitment to invest.

  4. Floating Rate Fixed Annuities.

    This type of annuity has a floating interest rate that is adjusted each month based on market interest rates. The higher the market interest rate the more you earn. It has the potential to earn higher interest than a single or multi-year guarantee annuity, but does not have the certainty of return.

  5. Pass-Through Rate Fixed Annuities.

    With a pass-through rate fixed annuity, the interest rate you earn is not fixed or limited. The fee earned by the insurance company is set at a fixed percentage, irrespective of the amount earned. You receive the balance of the interest earned after the insurance company has deducted its fee. This type of annuity has the potential for higher returns, but carries a greater level of risk.

Drawbacks to Fixed Annuities

Similar to other types of annuities, there are some drawbacks to investing in fixed annuities:

  • A lack of liquidity. It is not easy to free up funds in the event you need them earlier than planned. Fixed annuities normally become fully liquid according to the surrender schedule or upon the owner's death.
  • You must pay a penalty if you elect to withdraw funds from a fixed annuity before you reach age 59 1/2. However, as noted above, there is usually a provision in the contract to allow a percentage of the interest and/or principal to be withdrawn early and without penalty (typically this is limited to the interest earned in a 12-month period or 10%).

Fixed Annuity Quotes

Requesting fixed annuity quotes is easy. Simply complete the easy request form, starting with your zip code below. There is a wide variety of annuities available in most states, and some types of annuities can seem complex, especially if you are not familiar with annuities. Should you require any further information you will have the opportunity to discuss the various types of annuities with a qualified insurance agent in your state when you request your fixed annuity quotes.

Please note that all annuity quotes are free and you are under no obligation to purchase an annuity as a result of requesting a quote. Our goal is simply to assist you in making informed investment decisions based on your personal needs and circumstances.

 

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