A fixed annuity, or deferred annuity, is an insurance product that will return the principal you invest plus a guaranteed rate of interest. Fixed annuities are kind of like Certificates of Deposit (CDs). The main difference is that these annuities grow tax-deferred, while CDs do not.
Are Fixed Annuities Safe?
As far as investments go, fixed annuities are one of the safest kinds you can get. Fixed annuities are not backed by the Federal Deposit Insurance Corporation (FDIC), but providers are required by state law to protect outstanding contracts dollar for dollar. Another factor making these kinds of annuities safe is that they are insured by licensed and regulated firms, similar to the way homeowner’s insurance, or auto insurance firms are licensed and regulated.
According to Florida state insurance laws, deferred annuities are required to give you a minimum rate of interest on your income payments. This minimum rate of interest is to be outlined in your contract. The interest rates that you receive are usually higher than those offered through savings bonds or CDs. Insurance agents can issue higher rates of interest because they invest annuity assets into a portfolio of US treasuries and long term bonds while taking on the risk themselves. This strategy allows providers to pass the earnings along to you.
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Benefits of Fixed Annuities
Rates of interest are determined by the yield the insurance company provides from their portfolio of investments, which are primarily from government and corporate bonds. Insurance companies will have to pay the rate of interest outlined in the annuity contract, and therefore, will take on most of the risk. Variable annuities, on the other hand, will require you to choose the underlying investment, placing more risk on you.
The minimum guaranteed rate of interest protects you from declining interest rates because you will be guaranteed to get a rate of interest that is at least as much as the minimum rate outlined in your annuity contract. You can convert your deferred annuity into an immediate annuity at any time. When you choose to convert, the annuity can become a guaranteed income payment for a limited time or the rest of your life. There are fees involved with converting early, so make sure to read your contract carefully and discuss any questions or concerns you may have with your insurance agent.
Your life insurance company is required to fulfill all obligations outlined in your annuity contract. Since annuities are not federally insured, it is essential to choose your life insurance company wisely. Look for companies that earn high ratings for financial strength from major independent rating agencies. Also, since annuities can come with high fees, it is a smart idea to do some comparison shopping and also to compare with other kinds of investment options.
Criticisms of Fixed Annuities
These types of annuities are illiquid, meaning they are designed for slow, conservative growth over time. For this reason, this type of annuity may not be the right choice for an investor in need of a lot of cash fast. You can typically make one withdrawal per year during the accumulation period, and only an amount that is 10% or less of the account’s value.
An annuity’s accumulation period can last up to 15 years from the start date of the contract. During this period, you can only make withdrawals for 10% or less, without a charge. Withdrawals of more than 10% will be subject to a surrender charge. In some cases, you may also be required to pay a 10% tax penalty ass an annuity owner in addition to the standard income tax if you are younger than 59.5 years of age.
Many annuities do come with higher fees compared to other kinds of investments. If you are thinking about purchasing an annuity, you’ll want to make sure you get all of the information about all fees involved before committing to your purchase.
One of the most attractive facets of an annuity is the guarantees involved. Your life insurance agent will make contractual guarantees that are not typically available with other kinds of investments.
Fixed Annuity Versus Variable Annuity
Variable Annuity
Variable annuities are kind of like mutual funds. The main difference between a variable annuity and a mutual fund is the contractual guarantees that are involved with annuities. The contractual guarantee can vary, but a good example would be a contractual guarantee that gives you as the annuity owner, the ability to withdraw a specified amount every month after retirement no matter what has happened with the investment. Another main difference between variable annuities and mutual funds is that annuities are tax-deferred.
Fixed Annuity
Fixed annuities are safe from losing money because you are guaranteed to earn the rate outlined in your contract as long as you hold the annuity to the maturity date and do not withdraw money early. Most deferred annuities can last anywhere between three and ten years. At the maturity date, you can either withdraw your funds or roll them over into another annuity without being penalized.
Can You Lose Money in an Annuity?
You can lose money on an annuity if it is a variable annuity. If you own a variable annuity and the market underperforms, you can lose money. If you purchase a life-only income annuity and your death comes earlier than expected, your estate may lose money on the death benefit. If your goal is to purchase a simple annuity that guarantees you will get the return outlined in your contract, the fixed annuity is the way to go.
Are Fixed Annuities Safe?
As far as investments go, fixed annuities are one of the safest kinds you can get. Fixed annuities are not backed by the Federal Deposit Insurance Corporation (FDIC), but providers are required by state law to protect outstanding contracts dollar for dollar. Another factor making these kinds of annuities safe is that they are insured by licensed and regulated firms, similar to the way homeowner’s insurance, or auto insurance firms are licensed and regulated.
According to Florida state insurance laws, deferred annuities are required to give you a minimum rate of interest on your income payments. This minimum rate of interest is to be outlined in your contract. The interest rates that you receive are usually higher than those offered through savings bonds or CDs. Insurance agents can issue higher rates of interest because they invest annuity assets into a portfolio of US treasuries and long term bonds while taking on the risk themselves. This strategy allows providers to pass the earnings along to you.
Additional Fixed Annuity FAQs
Are fixed annuities a good idea?
- Annuities can provide regular income upon retirement. Annuities are a low-risk investment and can be a good idea for those desiring to avoid any investment risk.
What are fixed annuities paying?
- Fixed annuities can be paid immediately or at a determined point in the future. The rate of return depends on the contract, but it’s generally higher than CDs found in banks.
Are annuities protected from creditors in Florida?
- A Florida Statute number 222.13 guarantees protection for all annuities from creditors.
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