Fixed Annuities are insurance contracts that help protect you and provide you with fixed rates of return. A fixed annuity promises a guaranteed interest rate on the investor’s contribution to the financial account. The interest rates will tend to vary depending on the current financial environment.
Investors are locked into a rate of earning with fixed annuities which mean their investment is unaffected by market volatility. Additionally, fixed annuities will provide you a stream of guaranteed income. Financial advisors can help inform you how annuities work by explaining the benefits and drawbacks of purchasing this annuity.
How Does a Fixed Annuity Work?
Fixed annuities are offered by insurance companies and financial institutions. You can choose between doing a lump-sum payment or a series of payments over time. This money has a fixed rate of return and will continue to grow.
The amount the annuity gives out will depend on the financial institution that is selling them. The earnings in a fixed annuity are inferred until the investor starts to receive payments from their contribution.
What Type of Annuities are There?
There are many different types of annuities that are available to investors. What differentiates fixed annuities from the other types, is that they are usually offered by insurance companies and have fixed rates of interest.
In comparison, variable annuities are tax-deferred and you choose from a selection of sub-accounts or investments in a mutual fund. The value of the account is determined by how well the sub-accounts are performing in the market.
Retirees often invest in variable annuities so they can continue to be paid a stream of income while in retirement. Fixed index annuities are tax-deferred and they have variable interest rates. With a fixed-index annuity, you are provided with principal protection for your investment and opportunities for growth. These annuities allow you to earn additional money even in a slow market.
With an immediate annuity, you can make a single lump-sum payment. This means it will provide you with a stream of income for an agreed-upon period of time. Deferred annuities are contracts between investors and an insurance company. Meaning, within this contract the owner is promised a steady income or a large lump sum payment at a later date.
How Do You Buy or Sell Annuities?
You can buy annuities with the help of a financial advisor. When you are buying annuities you first need to assess your financial needs. Financial advisors can help you find an annuity that meets your financial goals.
Prior to buying annuities, you will need to find an annuity provider and focus on determining the terms of your contract. You should choose your annuity product based on your financial goals and contract terms.
After selecting an annuity provider and submitting your application to an insurance company, you can lock in your interest rate. Once you and the insurance company agree upon a rate, you then can transfer your funds for your payment. It’s important to understand tax implications and the interest rates that you choose before buying or selling an annuity.
Reasons to Buy
The best time to buy annuities is when you have a good handle on your financial situation. You need to have realistic investment goals in mind before you start making important financial decisions. People that are looking into retirement often purchase annuities because of the additional income.
Benefits & Drawbacks of Fixed Annuities
There are many benefits and potential drawbacks associated with buying or selling fixed annuities. Even though fixed annuities are very popular due to the guaranteed income, there are still many drawbacks one can face. It is important to highlight these setbacks since they can prevent you from earning your expected amount.
Fixed annuities provide you with guaranteed returns. These returns pay a set amount of interest which can be very beneficial if the market fails. This means one will never have to worry about market volatility since their returns are guaranteed and will not be affected.
As stated above, this guaranteed return comes from insurance companies that will be paying you a stream of income for the rest of your life. This income is not only fully guaranteed but also is unaffected by interest rates or the stock market.
One drawback is that the returns on fixed annuities often can be limited. Insurance companies will tend to have “teaser rates” to attract investors. Over time that initial percentage is reduced and you will be left producing minimal returns in your investment.
Also, with fixed annuities, you have to be aware of all the fees and commissions. Annuity policies often have fees that will lessen your potential returns. A financial advisor can help explain the built-in fees that may be associated with your annuity plan.
Fixed Annuity vs Variable Annuity
Fixed annuities have payment terms that don’t fluctuate based on the agreement. A variable annuity is different since it fluctuates with the returns on the mutual fund that you invested in.
What’s Next: Hiring a Financial Advisor for Fixed Annuity Contracts
A financial advisor can offer you guidance and help you with making any annuity investments. An experienced financial advisor can break down the various types of annuities and their future financial benefits.
You should look into consulting with a financial advisor to help you understand an annuity contract before you make any investment decisions.