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A fixed annuity refers to a type of contract between you and the insurance company. It allows you to accumulate capital over a long period of time through a tax-deferred basis. In exchange, the insurance company guarantees you of your premium investment and credits your annuity account with a fixed interest rate.
A Little More on What is a Fixed Annuity
Insurance companies issue fixed annuities to those individuals seeking assurance on rates of return without risking their premium contributions. In most cases, life insurance firms are the ones that issue fixed annuities. These policies come with some tax benefits like tax-deferred on growth earnings. The policyholders pay taxes during the withdrawal of earnings.
Fixed annuities provide investment safety and are predictable. They help people to save and grow their money through a tax-deferred method, with lower risk compared to variable annuities. In other words, the insurance company locks in your rate earnings for a long period, and it remains unaffected by fluctuations in the market.
Depending on the contract, a fixed annuity can be immediate or deferred. As a policyholder, you may state getting your annuity payments within a year, or you may specify that the payments start at a later time. For deferred annuities, you will begin receiving your payments at retirement. To be able to know whether or not a fixed annuity is the best policy, you should first understand how it works and also compare it with other types of annuities.
Fixed Annuity Benefits
- Tax deferral- Diferring tax allows you to profit from the compounded growth.
- No market risk- Fixed annuity guarantees the policyholders of interest rates regardless of the fluctuations in the market.
- Premium and interest protection- It involves a minimal risk exposure and provides the policyholders with an opportunity to grow their premium investments at a predetermined interest rate. Fixed annuity interest rates are generally higher compared to other traditional saving methods.
- Beneficiary protection: Fixed annuity allows you to pass your investment to your selected beneficiaries to avoid costly probate. Available is also optional riders at an extra cost, which may enhance the amount receivable by your beneficiaries
- Flexibility- When you choose to annuitize your contract to include a lifetime income, you are given various payout options to choose from. You can set payments to be a lifetime source of income or after a specific period of time.
- Lower investment minimums: You are only required to pay a one-off payment of between $1000 to $10,000 as your initial investment.