Benefits of Fixed Annuities
by: liquidgraph
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Fixed annuities are set up as single premium investments that guarantee the purchaser a minimum rate of interest for the annuity’s term. Two basic types of fixed rate annuities are available to purchasers – life annuities and term certain annuities. Life annuities pay a fixed amount at regular intervals until the annuitant dies. They allow the purchaser to have a secure source of income that they do not have to worry about outliving. Term certain annuities, on the other hand, pay the set amount until the contract expires.
Distributions from fixed rate annuities can be either immediate or deferred. Immediate distributions usually start, at the maximum within one year, of the contract being initiated. Deferred annuities pay out at a point in the future.
A fixed annuity is considered a low-risk investment because of the stable interest rate component of the policy. Investors benefit if interest rates fall, but not if they rise.
Bank-issued CDs are actually very similar instruments to fixed annuities. However, annuities are designed specifically for retirement savings. A typical fixed annuity will have an interest rate from 3 to 10%, and the term will be for 1 to 10 years. The initial premium can range between $5,000 and $1,000,000. When compared to CDs, annuities have more liquidity and offer tax-deferred benefits.
In general, this product requires very little management by investors. Once the contract is initiated and the premium is paid, the investment does not need to be constantly monitored. Some fixed annuities can also be set up with an optional death benefit which can serve as life insurance without requiring a separate policy.
Unlike 401(k)s and IRAs, fixed rate annuities do not have contribution restrictions associated with them. Annuitants can have as many policies as they want. In addition, funds within an annuity can be bequeathed as inheritance to beneficiaries at a status that is probate-free. Beneficiaries will not be subject to any estate or death taxes. Annuities also can be gifted tax-free. Gifts can be given to an unlimited number of individuals at an amount up to $10,000 per individual per year.
As with any financial product, there are some disadvantages to fixed annuities. For example, the IRS will levy a 10% penalty if income is withdrawn before the annuitant reaches the age of 60. In addition, growth in a fixed annuity is tax-deferred. However, when the income is received it is taxed at ordinary income rates and not at capital gains rates. Finally, with the single premium provision, no further funds can be added to the same annuity contract after it is initially set up.
In conclusion, fixed annuities offer investors a low risk way to save for retirement. As long as the contract is not terminated early, it can offer a guaranteed income in retirement. If a life annuity is selected, this income is guaranteed for the life of the annuitant. This provision eliminates the possibility that the investor can outlive their retirement savings.
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About the Author
For more information from Steven on how to invest in annuities, their pros & cons, and common investment mistakes, visit Free Annuity Rates.com. To learn more about the differences between variable and index annuities, visit the Variable Annuity or Index Annuity Guides.
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