Fixed Annuity Basics

Fixed Annuity Basics:   

Fixed annuities, those with interest rates declared in advance and those that credit interest when there is a positive change in a market index or indices are a sensible and safe consideration for any financial or retirement plan. They allow individuals who choose to protect savings and interest earned to safely save for retirement or to receive retirement income.  As with any product, finding the right annuity for our client’s financial plan means that we need to understand the basics so we know what to look for and what to ask.  

What is an Annuity?

An annuity is:

  1. a contract or providing for the payment of;
  2. a sum of money payable yearly or at other regular intervals for;
  3. life, a specified period, or a combination of both.

Annuities guarantee that our clients cannot outlive their assets.  More specifically, annuities protect against the risk that they will live so long they use up their retirement assets and not have enough to live on in the later years.  

Insurance companies guarantee that, if and when the owner chooses, the company will make payments to the owner for a specified period or as long as the owner lives or a combination of both.  The amount of the payments is based upon the amount of the contract at the time the owner elects to receive periodic income.  The contract will specify the minimum rate used to determine the amount of periodic income.  

There are two basic types of annuities:

  1. Immediate annuity — income stream begins immediately upon payment of the first premium.
  2. Deferred annuity — income stream begins later (or not at all, at the owner’s discretion). There are two types of deferred annuities: fixed annuities and variable annuities.

Interest Earnings:       

Under fixed annuities with declared rates of interest, the insurance company will tell you up front the interest rate it will credit. The interest rate will be guarantee for a period, and may vary from one year, three years, five years or longer.  

Under fixed annuities with indexed rates of interest, the insurance company does not tell you the interest rate up front, but rather at the end of a period (e.g., a year) the company calculates the interest rate using the formula (stated in the contract) that calculates changes in an independent index (also named in the contract).  

The owner bears no investment risk that the insurance company will fail to credit the interest rate during the rate period that is declared or determined by the formula.  The owner may be said to bear the risk that subsequent declared rates or index formulas may be reduced, but never below a minimum rate.    


TOP TEN Reasons to Consider a Fixed Annuity:   

  1. No loss of premium and prior earned interest from stock-market fluctuations
  2. Unlike securities and variable annuities, the insurance company - NOT OUR CLIENTS- bears the risk that their principal and prior earnings will be protected from stock market losses.
  3. Guaranteed return of principal and all earned interest when held to term.
  4. Guaranteed minimum interest credited when higher than index interest credited.
  5. Guaranteed income they cannot outlive and the right to choose that guaranteed income today (immediately) or in the future (deferred).
  6. Improved compounded accumulation by deferring income taxes.
  7. Term choices from 3 years to 18 years to match the individual’s unique financial plan.
  8. Ability to remove asset from probate to expedite transfer of savings to loved ones or charity.
  9. Free look period when policy is received where no charges will be applied if they decide not to take the annuity.
  10. Interest earnings that are not considered income for Social Security benefit determination.

*Liquidity benefits:

  1. Full receipt of principal and interest earnings at death, terminal illness, or confinement in a nursing home
  2. Free annual withdrawals
  3. Full receipt of principal and interest earnings when payout structured over a minimum specified period (typically 5 years) or longer

*These benefits are available on a product-by-product basis and vary by product.  Call us for further details.

Surrender Periods:  

In exchange for the annuity guarantees and protection, fixed declared-rate annuities and fixed indexed annuities have surrender periods during which our client may be charged for withdrawing their money.  Products are available for surrender periods as short as one year and as long as 16 years.  Of almost 350 indexed rated products available 80% are under 10 years with about half of those being seven years or less. We will find the surrender period and product that best meets our client's retirement plan. 

Uses of a Fixed Annuity in Retirement Planning:  

  1. Longer term accumulation where liquidity is not as important as principal protection.
  2. Wealth transfer and skipping generation transfers.
  3. A steady and structured income stream for a spend-thrift relative or loved one.
  4. Funding other financial products (e.g., life insurance) using required minimum distributions (qualified plans) or free withdrawals (non-qualified).
  5. Avoiding the cost and time of probate
  6. Simplified and less costly trust-like management of assets.
  7. As the secure part of an asset allocation program; for a risk averse client who wants an opportunity for higher returns in a low interest rate environment.


Fixed Annuity Buying Tips To Consider:    

  1. Target safe money need - put only that money that you want to protect and you don’t anticipate needing for medical bills or income needs.
  2. Diversify products as well as risk by putting savings or investments into more than one financial product.
  3. Understand your liquidity options and when surrender charges do and don’t apply.
  4. Make sure you know the licensing status of your agent and check with your state insurance department if you have questions or concerns.

Discuss your decisions with loved ones and beneficiaries.

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