What Are Fixed Annuities?

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A contract issued by an insurance company to promise to pay income based on a fixed return is known as a Fixed Annuity. Fixed Annuity contracts provide peace of mind to individuals concerned about market returns and are looking to protect an asset. This product is used to provide a guaranteed stream of income in the future.

In the case of immediate annuities the income paid in is based on the life of an individual known as the annuitant. Income can pay out immediately or within a year or deferred over time after the initial deposit. The interest rate guarantee is a promise to pay based on the insurer’s financial ability. The amount of interest is usually tied to some underlying bond index.

The rate of return for fixed annuities is lower than what is found for variable annuities. Where the rate is guarantee in a Fixed Annuity, Variable Annuities are investment products subject to market risk. The potential for higher market returns is tempered by the risk of losing some or all of the value. Fixed annuities would be considered appropriate for an individual with a low risk profile.

During the accumulation or build up phase, money deposited grows on a tax-deferred basis. This is an advantage that fixed annuities have over investment products. When the owner of the contract decides to receive income, this is the annuitization phase. Taxes are taken out based on an exclusion formula and only on the growth.

Often annuities are compared to the returns found in products such as mutual funds. This is incorrect since annuities are subject to mortality and expense charges not associated with investments. These higher expense loads makes the comparison inappropriate and could be deemed misleading. Fixed annuities are not subject to market or investment risk like mutual funds. Other than the financial stability of the insurer, fixed annuities tend to be relatively safe products, used mostly or retirement planning.

Fixed Annuities are considered tax-advantaged products like Individual Retirement Accounts. The tax advantage comes from the fact that money put in an annuity grows tax deferred and should not be used before 59 and half. Taxes, fees and penalties are in place to discourage premature withdrawal of annuity assets, except for special purposes. The fixed annuities also have surrender charges in place to ensure a long-term prospective. Surrender charges range up to 30 percent of assets and last as long as 20 years.

The rates found with many fixed annuities are comparable to those banks pay on their CDs. Careful consideration should be made regarding the difference in fee structures. A type of Fixed Annuity used to distribute large payments, such as inheritances, are structured settlement annuities. These annuities help an individual better manage large sums of money and protect against principal loss.

Consult with a licensed insurance agent or other professional before purchasing a fixed annuity. A thorough discussion of your financial goals, objectives and risk tolerance should take place. Fixed and immediate annuities are not for everyone. This will help to determine which annuity product is appropriate for your needs.

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Source by Frank Rodriguez
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