Fixed Annuity Guide

Fixed annuities, also referred to as "fixed income annuities" are designed to provide a secure retirement savings and are best when used as a long term investment. It is typically preferred by conservative investors and behaves in similar manner to a CD. The returns yielded are typically higher than CD's or Bonds, thus giving you a very safe, low risk investment.

Fixed annuities are a contract between you (the annuitant) and an insurance company with the agreement that the investment will earn a fixed rate of return until expiration of the annuitant. If there is a death benefit, then the principal and interest earned can be bequeathed to a beneficiary.

A single large premium of anywhere between $5000-$1,000,000 invested for the term of 1-10 years, will provide a guaranteed minimum interest that protects your principal. The fixed annuity can also be tax deferred or immediate. It is an investment that retirees or semi-retired individuals use to provide long term protection against loss of income. This type of annuity also provides safety from market risk and greater advantageous benefits when it is held for the long term

A fixed annuity premium can be paid in one lump sum- either from a savings or retirement investment such as an IRA. Either way, the investment is guaranteed to earn fixed rate of return during the accumulation phase.

Types of Fixed Annuities

There are many different types and strategies associated with annuities, however there are a few that are used more often for retirement purposes. Below is a list of the most common types.

Annuity Certain- this contract does not depend how long the annuitant survives. The annuitization phase is for definite period of time.

Equity-Indexed Annuity- the agreement of this annuity offers a guaranteed minimum interest rate for the life of the contract. Depending on the market conditions or equity index of the investments that are chosen it also give a bonus even if the market is down. Therefore, it protects your principal.

Joint Annuity- the contract of this annuity states that it covers the life of two or more individuals, however it stops paying out at the event of the first death, regardless of how long the remaining investor lives.

Joint and Survivor Annuity- this annuity contract also covers two or more individuals, however unlike the "joint annuity" this one continues to pay as long as any annuitant is alive.

Installment Refund Annuity- this agreement offers a death benefit, thus if the annuitant expires the remaining payments of the annuity passes to the beneficiary for as long as the investment is completely paid back.

Life Annuity- this annuity annuitization phase last as long as the annuitant survives. Payments stop when the annuitant expires. This annuity is also referred to as Whole Life Annuity or Single Life Annuity.

Life Annuity Certain- this annuity agreement gives a finite pre-determined length of time of the annuitization period, however will continue to pay out even when the annuitant expires. Essentially, if an annuitant expires before the annuity contract expires then a death benefit will bequeathed the remaining payments to the beneficiary.

Modified Cash Refund Annuity- In the event of the death of the annuitant, this annuity contract agrees to pay the beneficiary equal to the amount of the contributions.

Pure Annuity- this annuity contract agrees that the annuitization period last as long as the annuitant survives and expires at the event of death.

Features of the Fixed Annuity

# 1-10 year terms
# Payout Phase- creates a fixed stream of income
# Death Benefits- Similar to life insurance a death benefit is an option which saves you money from purchasing a separate life insurance policy.
# Tax Deferred
# Inheritance- Principal and interest earned can be passed on to loved ones, estate tax and probate free.
# Premiums are Fixed- Premium is in one lump sum and you cannot contribute additional monies.
# Accumulation Phase- the longer the annuity is held, the greater growth of the investment during the accumulation period and larger pay out.

Advantages of Fixed Annuities

Fixed annuities have many features that provides protection against loss of your investment. The most appealing for investors is that it provides a guaranteed minimum interest rate regardless of market volatility. In fact, some types of annuities such as the "equity index annuity" not only gives you a guaranteed minimum interest rate but also provides a bonus when the market is high.

1. Principal Protection
2. Guaranteed Rate of Return
3. Tax Deferred Growth
4. Features similar to Life Insurance- With a death benefit feature you don't have to buy an additional life insurance policy, thus saving you money. Similar to life insurance, this feature can provide your beneficiaries with a stream of income for the agreed term.
5. Protection against outliving your retirement.
6. Protection against market volatility.
7. Disability Protection- in the event of a disability of the annuitant during work life, the annuity can provide a stream of income.
8. Solid Returns on your investment- typically 3-10%

Disadvantages of Fixed Annuities

Similar to any type of investment there can be many disadvantages with fixed annuities. Although, it can provide steady cash flow for you and a beneficiary when structured properly, there can also be some hefty penalties.

Therefore, the most disadvantageous feature of a fixed annuity are the "surrender charges". Not only does this make the investment illiquid, the fees can eat away at your returns if you pull your money out before the agreed term.

1. High surrender charges
2. IRS Penalty of 10% if pulled out early
3. You cannot have additional contributions.

Another disadvantage is that that the fixed annuities do not adjust to inflation very well. Over the long term the buying power of the pay out begins to decline. However, there is a way to structure the investment to provide protection against loss of value of the stream of income.

Annuities are typically misunderstood by investors, however they are a very strong tool to add to your financial portfolio. When retiring, the most important factor when planning and preparing for it is that you have a steady stream of income that is safe and secure, in this regard, fixed annuities are very effective.

Most importantly, if you plan to use fixed annuities as a financial planning vehicle, consulting with a financial advisor can give you peace of mind that it is the right investment for you. In addition, a financial advisor can look at your financial portfolio, consider you values, financial goals, and asset allocation to structure the fixed annuity to fit your needs.