subject: Fixed Annuities-returns For Life [print this page] What are Fixed annuities? This is a contract between an individual and an insurance company that provides a way for an individual to guarantee that he or she receives income for life. In contrast, equities will pay dividends and will also provide income, but the income is not guaranteed. A fixed annuity will guarantee that an individual will have a lifelong stream of income.
There are two different types of fixed annuities and variable annuities. One type is the deferred fixed annuity. Typically, individuals will have this type of account through an employer. The funds in this account may be accumulated over a few years or over decades. The annuity owner is required to make regular payments into the account, called premiums. If the individual has the account through an employer, the premiums can be deducted directly from the employee's paycheck. If the employee wishes to purchase the annuities independently of their employer's plan, they can also make payments directly to the life insurance company. The value of a deferred fixed annuity will grow much faster than some accounts, because the monies are tax-deferred. The account owner can also choose whether to fund with either pre-tax or post-tax dollars.
The second type is the immediate fixed annuity. This type of account is funded with a single premium, usually coming from a savings account, checking account, or possibly the payout from the life insurance company of a loved one, after their passing. It can also be funded by mandatory distributions taken from any qualifying account-possibly from a trust fund. Distributions from this kind of account will start almost immediately, usually within the first year after the account is established. The immediate fixed annuity is generally funded with after-tax dollars.
What Are the Pros and Cons of a Fixed Annuity?
The return on a fixed annuity is constant. It can change from year to year, but once it is set for that year, it is unaffected by stock market fluctuations. This is a plus for retirees and others who are budgeted tightly, who need to know how much money they can expect each month. Although the return on investment can change from one year to the next, most insurance companies guarantee a rate between 3% and 5%. The down side to this is that it may not be enough to offset any cost of living increases. Insurance companies offer a cost of living increase rider (COLA). This rider increases the cost of the contract, but also increases the amount of money paid annually, to offset inflation. Most insurance companies now also offer some sort of guarantee on the account, if the owner were to die prematurely, minus any fees and additional charges. The beneficiary receives the remaining payments.
Are Fixed Annuities Right for You?
Unlike indexed annuities, or variable annuities, fixed annuities are unaffected by changes in the stock market. Retirees should strongly consider fixed annuities. Equity dividends, which can be cancelled should the company decide to, can provide a good income, but they are not guaranteed. Fixed annuities are a stable source of income for life. Even if the payouts exceed the amount of premiums paid into the account, the insurance company is obligated to pay for the lifetime of the account owner. This is a good investment choice for those who don't have many liquid assets at their disposal, and would like to guarantee a steady source of retirement income.
