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What Is A Fixed Annuity

A fixed annuity is a conservative savings vehicle used to accumulate wealth.  A fixed annuity is issued by an insurance company and are backed by the full faith and credit of the underlying insurance company, regardless of the amount.  They are generally good investments for the long haul.  Typically the rates are much better than CD’s which are offered through banks and credit unions.  To make it easier to understand what a Fixed Annuity is we will compare  it to another popular savings vehicle, a Certificate of Deposit (CD).

Does a Fixed Annuity offer a guaranteed rate of Return?

Yes.

Can I withdrawal my money before the term is up?

Yes, you can withdrawal just the interest if you like and in some cases you have the ability to withdrawal 10 to 20% of the contract value each year without paying a penalty.  In addition most companies that we offer have a principal guarantee which means even if you had to cancel your contract early you would receive back no less than what you put in.

Is this considered a low risk investment?

Yes, because it offers  positive guaranteed rate of return.

How is the interest taxed?

The best part about annuities is that all the interest you earn is tax deferred.  That means in the years that you do not withdrawal the interest you don’t pay taxes.  This is a distinct difference with a CD.  In a CD if whether or not you spend the earned interest or not you are still forced to pay taxes on that interest.

There are two types of Fixed Annuity as described below.

CD Type Fixed Annuities are very much like CD’s at the bank and are the simplest type of fixed annuity to understand.  They have a set contract period, 3-10 years, and a guaranteed rate of return for all years.  That means you know exactly what you are getting each year and we can calculate an average yield for the investment.  A contract for this type of fixed annuity would read like this; 5 Year fixed annuity paying 4.50% each year with an average yield of 4.50%. For more information check out CD Type Fixed Annuities.

Traditional Fixed Annuities are very similar to CD type fixed annuities with a slight variation, they don’t offer a guaranteed rate of return for the entire period.  They still have a set contract term, 3-10 years, but they will generally offer a high rate of return for the first couple of years of the contract.  When the initial guaranteed rate runs out your rate then resets to the going “market rate”, there is a minimum rate they have to pay typically 2-3%.  A contract for this type of annuity would read like this; 5 year fixed annuity paying 6.50% for the first 2 years with a minimum rate of 3%.  That means you would earn 6.50% for the first two years of this contract.  Each year in years 3-5 your interest rate would reset at the going rate but is guaranteed to go no less than 3%.  For a more detailed example check out Fixed Annuity Examples.

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