What are the characteristics of fixed annuities?


Fixed annuities are one of the major annuity options offered by insurance companies. Providing safety of investment and guaranteed return, fixed annuities are favored by people who wish to invest their money but have limited funds and are therefore not willing to take any investment risks.

Accumulation Period of Fixed Annuities

During this period, premiums are credited with interest which accumulates on a yearly basis. There are two interest rates under fixed annuities.

There is a guaranteed minimum interest rate, normally amounting to between 1 and 3 percent.

The current rate is contingent on current market conditions and it varies, but it is usually around 4 percent. Typically, an insurer will guarantee that a fixed annuity is credited current interest rate for a period between one and five years. After that period, insurers guarantee a minimum rate of return, in accordance with the guaranteed interest rate.

Fixed Annuity Premium Options

Typically, fixed annuities require fixed premium payments, making the annuity payout amount very predictable. In recent years, fixed premium annuities have been replaced by flexible premium annuities which allow the contract holder to make the premium payments at any time and in any amount desired.

Fixed Annuities Payout Period

This period, also referred to as liquidation period, starts at the end of the accumulation period. It is when the annuity payments to the annuitant begin.

Under a fixed annuity, the funds that have accumulated during the accumulation period are annuitized, or distributed and paid to the annuitant in fixed and guaranteed lifetime payments. Due to the fact that fixed annuities payments stay the same, fixed annuities do not provide any protection against inflation.

Fixed Annuity Payments

Under fixed annuities, the buyer has two payment options:

  • Immediate annuities guarantee that the income payments start immediately after the inception of the annuity, usually within a month/or one year from the purchase date, depending on whether the income is paid monthly or annually.
  • Deferred annuities can be purchased that provide income payments at some future date which is specified in the contract. This is a way of accumulating cash that is not taxable prior to retirement. The annuitant receives the accumulated funds in a lump sum, or have them paid in installments, when the annuity matures.
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