Why Consider a Fixed Annuity?
A fixed annuity is one of the most common types of annuities. In general, they pay a fixed interest rate. Fixed annuities have pros and cons associated with each of them, and should be carefully considered before purchasing.
As the name implies, the interest rates associated with fixed annuities are fixed. They are usually set in advance, so the consumer knows what to expect from them before purchase. Some fixed annuities offer longer term interest rate guarantees, ranging from 1-10 years usually. Another type of fixed annuity may change its interest rate on an annual basis. Most all fixed annuities have a minimum interest rate guarantee. Before purchasing a fixed annuity, make sure to understand what the minimum interest rate guarantees are so you fully understand the contract.
In addition to the interest rate, it is also important to consider surrender periods and charges. One should plan on holding the annuity until the surrender periods have been satisfied, thus making the annuity liquid without any penalties. In the event that an annuity owner needs access to their money before the surrender charge period is up, they may incur a surrender penalty. Understanding these penalties will be an important consideration before purchasing a fixed annuity. Many fixed annuities will allow for penalty-free withdrawals. This is often in the amount of 5 or 10% of the contract’s value. Carefully consider your liquidity needs before purchasing a fixed Annuity.
Who might consider a fixed annuity?
An individual who wants a fixed, guaranteed rate of return.
An individual who does not want volatility in their investment.
An individual who can work within the constraints of the annuity contract.
Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.