Fixed Annuity: The Definitive Guide
Fixed Annuity Definition:
With a fixed annuity, the insurance company guarantees both the rate of return (the interest rate) and the payout to the investor. Although the word “fixed” might suggest otherwise, the interest rate on a fixed annuity can change over time.
The contract will explain whether, how, and when this can happen. Often the interest rate is fixed for several years and then changes periodically based on current rates. Payouts can be for an entire lifetime, or you can choose another time period.
Source: “Learn to Invest, Investment Types, Annuities, Fixed Annuities.” Financial Industry Regulatory Authority (FINRA). Visit FINRA’s Fixed Annuities Webpage
Fixed Annuities vs. CD's
Fixed annuities work very much like a certificate of deposit (CD). Both a fixed annuity and a CD provide principal protection, meaning your account value will not decrease due to market performance.
A fixed annuity, or MYGA, guarantees a set interest rate for a specified period of time – just like a CD. However, Fixed annuity guarantees are backed by the claims-paying ability of the issuing insurance company and are not insured by the FDIC like a CD.
While not FDIC insured, State Insurance Guaranty Associations provide a safety net for their state’s annuity policyholders. These Guaranty Associations guarantee policyholders continue to receive coverage (up to the limits spelled out by state law) even if their insurer is declared insolvent.
|FIXED ANNUITY||CD (CERTIFICATE OF DEPOSIT)|
|SOLD BY||Insurance Companies||Banks|
|AMOUNT YOU CAN INVEST||$2,000 - $1,000,000||Essentially Any Amount|
|INVESTMENT DURATION||3 years - 10 years||3 months - 5 years|
|INTEREST RATES||Rates by product but usually higher.||Varies by financial institution, term and investment amount.|
|LIQUIDITY||Usually, 10% annually or interest earned.||Almost always accumulated interest.|
|GUARANTEES||The claims-paying ability to issue Insurer and by State Guaranty Funds.||Backed by the FDIC up to $250,000 per depositor, per institution.|
|DEATH BENEFIT||Passed directly to the beneficiary without probate process.||Probate process required.|
Current Fixed Annuity Rates
Below is a chart of the best available Multi-Year Guarantee Annuity Rates by term.
|2 yrs||SILAC||B+||Secure Savings Elite 2||2.15%|
|3 yrs||Oceanview Life||A-||Harbourview 3||2.35%|
|4 yrs||Oceanview Life||A-||Oceanview Harbourview 4 Year Annuity||2.60%|
|5 yrs||Atlantic Coast Life||B++||Safe Haven||3.00%|
|6 yrs||Atlantic Coast Life||B++||Safe Haven||3.07%|
|7 yrs||Security Sentinel Life||B++||Personal Choice||3.10%|
|8 yrs||Oxford Life Insurance||A-||Multi-Select MYGA||2.80%|
|9 yrs||Liberty Bankers Life||B++||Bankers Elite 9||3.00%|
|10 yrs||Atlantic Coast Life||B++||Safe Haven||3.20%|
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Fixed Annuity Buyers GuideFixed annuities, or MYGAs, are the simplest of all annuities making them the easiest variety to shop for and compare. However, there are still a few important items to consider besides just looking for the highest guaranteed rate of return. Duration: Typically the longer contract you purchase the higher your guaranteed interest rate will be. But that is not the case, especially given the current inverted yield curve. Liquidity: Most all fixed annuities have some type of annual free withdrawals, but the amount available varies by product. You’ll see most of the fixed annuities at our marketplace provide interest-only withdrawals annually. Others allow for 10% Free Withdrawals (10% of the previous years’ account value) annually. Insurer Company’s Financial Rating An indicator of an insurers’ ability to fulfill financial commitments to its policyholders. Usually, a lesser-rated insurance company will offer higher fixed annuity rates, but that is not always the case. Learn more about mean.
Rate Shopper? You can shop and compare more than 150 fixed annuity products at our Online Fixed Annuity Store.
Fixed Annuity Pros and Cons
Advantages of a Fixed Annuity
A fixed annuity may be a good choice for those who want a guaranteed interest rate without market participation (minimal investment risk, but still a chance to grow money at a set interest rate).
The tax-deferred status annuities receive enable you to benefit from compounded growth.
Principal and interest protection
It offers minimal investment risk exposure but still provides the opportunity to grow money at a set interest rate. The rates are generally higher than CDs from a bank.
No Market Risk
A fixed annuity offers guaranteed interest rates without exposure to market fluctuations.
If choosing to annuitize your contract for lifetime income, you have the ability to choose from different payout options: set payments for a specified period or a lifetime stream of income.
Lower investment minimums
A fixed annuity will usually require only $1,000 to $10,000 for an initial investment.
You can pass assets to beneficiaries and avoid the costly probate process. Optional riders at an additional cost can enhance the amount that beneficiaries may receive upon the annuity owner’s passing.
Disadvantages of a Fixed Annuity
Less Opportunity for GrowthWithout market participation, the growth opportunity is minimal compared with variable annuities, but there is also less risk.
Inconsistent ratesSome rates can be offered for a fixed period and then drop after that set period.
Interest may not keep up with inflationIf this happens, you could lose buying power.
IMPORTANT NOTE: Ask a tax professional about your individual situation. The information below is general and should not be considered tax advice.
Current federal law gives annuities special tax treatment. Income tax on annuities is deferred. That means you are not taxed on any interest or investment returns while your money is in the annuity.
This isn’t the same as tax-free. You will pay ordinary income tax when you make a withdrawal, receive an income stream, or receive each annuity payment. When you die, your survivors will typically owe income taxes on any death benefit they receive from an annuity. There are other ways to save that offer tax advantages, including Individual Retirement Accounts (IRAs).
*Friendly TipYou can buy an annuity to fund an IRA, but you also can fund your IRA other ways and get the same tax advantages. When you take a withdrawal or receive payments, you’ll pay ordinary income tax on all of the money you receive (not just the interest or the investment return). You also may have to pay a 10% tax penalty if you withdraw money before your age 59½.
Do Fixed Annuities Allow Me to Access My Money?
Fixed annuities allow for annual penalty-free withdrawals. Some fixed annuities allow for penalty-free withdrawals in the first contract year, but some don’t begin until year 2 (this varies by the insurance company). The amount is typically 10% of your account value. However, many fixed annuities (MYGAs) allow interest-only withdrawals.
10% FREE WITHDRAWALS: This allows the owner to withdraw 10% of the previous year’s account value annually without any penalty.
INTEREST ONLY WITHDRAWALS: This allows the owner to withdraw accumulated interest annually without penalty. Interest can be taken systematically monthly, quarterly, semi-annually, or annually. Interest-only free withdrawals are commonly available beginning year one, but this varies from company to company.
Amounts withdrew more than the penalty-free withdrawal allowance may be subject to early withdrawal charges. Additionally, withdrawals before age 591/2 may be subject to IRS restrictions and a 10% federal penalty tax.
Most annuities have waivers, or provisions, built in to provide increased liquidity in certain situations.
EXTENDED CARE WAIVER – After the first contract year, if you are confined to a nursing home or long-term care facility for at least 90 consecutive days, you have the option to withdraw up to 100% of the account value without incurring an early withdrawal charge.
TERMINAL ILLNESS WAIVER – After the first contract year, if you are diagnosed by a physician as having a terminal illness, you have the option to withdraw up to 100% of the account value without incurring an early withdrawal charge. A terminal illness is defined as having a prognosis of survival of 12 months or less, or a longer period as required by state law.
*Extended care and terminal illness waiver riders are not available in Massachusetts. In California, the Extended Care Waiver Rider has been replaced with the Waiver of Early Withdrawal Charges for Facility Care or Home Care or Community-Based Services Rider, which provides for a waiver of early withdrawal charges under an expanded variety of circumstances.
Market Value Adjustment (MVA)
Important Note: An MVA almost always only applies when a surrender charge applies. As long as you do not make a withdrawal greater than your contractually allowed amount, an MVA adjustment will not apply.In general, if interest rates are lower when you withdraw money than they were when you bought the annuity, the MVA could increase the amount you could take from your annuity. If interest rates are higher than when you bought the annuity, the MVA could reduce the amount you could take from your annuity. Every MVA calculation is different. Check your contract and disclosure or prospectus for details. SOURCE: “Buyers Guide for Deferred Annuities: Fixed 2013.” © 1999, 2007, 2013 National Association of Insurance Commissioners.
Fixed Annuities and Lifetime Income Options
A fixed annuity provides the opportunity to turn the money you’ve accumulated into a steady stream of retirement income that lasts for a specific number of years or life.
At some future time, you can choose to annuitize your annuity and start to receive guaranteed fixed income payments for life or a period of time you choose. After payments begin, you can’t take any other money out of the annuity.
You also usually can’t change the number of your payments. If you die before the payment period ends, your survivors may not receive any payments, depending on the payout option you choose.
Fixed Annuity Income Options Explained
Fixed Period– You receive income benefit payments for a fixed period that you select, commonly 10 years. This is called a 10-year period certain.
Life or Life with a Period Certain – You receive income benefit payments for life. If you select a minimum fixed period and pass away before the end of the period, the remaining income benefit payments are paid to the person you designate.
Joint and survivor – Income benefit payments are guaranteed for your life and the life of a designated joint annuitant. If you are survived by the joint annuitant, he or she will continue to receive the income payments for life.
Joint and one-half survivor – Income benefit payments are guaranteed for your life and the life of a designated joint annuitant. If you are survived by the joint annuitant, he or she will receive 50% of the income benefit payment for life.
Fixed Annuity Riders
Keep in mind that riders are optional and come with an additional cost.
They allow you to pass assets to beneficiaries while potentially avoiding the time-consuming and costly probate process. Death benefits may be used to:
- Continue payments to a designated beneficiary
- Pay for the owner’s final costs (such as a funeral, burial, or estate planning)
- Benefit a charity or organization that has been named as a beneficiary
Generally, most annuity contracts waive surrender charges for a death benefit, as well as for a terminal illness.
Most annuities also provide a standard death benefit — often your annuity’s full account value.
Some annuities offer optional death benefits that let you lock in the highest amount (annually or monthly) or a set rate of interest (typically 3% to 5%) even if you die when performance is down.
Living benefit riders provide guaranteed lifetime income for you (and your spouse, when elected) that:
- Can include guaranteed increases or “roll-ups” for your future income
- Offer consistent lifetime payouts that are based on the age when you begin taking income
Some fixed annuities, especially fixed indexed annuities, offer a guaranteed living benefits rider, usually at an extra cost. A common type is called a guaranteed lifetime withdrawal benefit (GLWB) that guarantees to make income payments you can’t outlive. While you get payments, the money still in your annuity continues to earn interest.
You can choose to stop and restart the payments or you might be able to make extra money from your annuity. Even if the payments reduce the annuity’s value to zero at some point, you’ll continue to get payments for the rest of your life. If you die while receiving payments, your survivors may get some or all of the money left in your annuity.
Fixed Annuity Terminology
- Account Value: The amount of money in the annuity. Simpler term: Account balance, Related term: Contract value
- Annuity: A financial product that can offer protected lifetime income and even potentially grow your money.
- Death Benefit: A benefit that pays your beneficiary the remaining account balance or income should you pass away. Simpler term: Beneficiary benefit; Related terms: Legacy benefit, Benefit to your heirs, Legacy, Legacy protection benefit, and Family protection.
- Fixed Annuity An annuity that delivers 100% protection from market downturns with the potential for earned interest. Note that for a deferred fixed annuity, there is the benefit of a guaranteed interest rate, in addition to downside protection and the potential for earned interest.
- Annuitization is a one-time process of taking your annuity account and turning it into regular payments that will last for the rest of your life. The annuitized payments continue, regardless of how long you live, even if the total payments exceed the original account value.
Yes. Insurance companies as a whole have a long history of stability, even thru our nation’s most difficult economic times. Fixed annuities are backed by the full faith and credit of the issuing insurance company so it is important to consider the financial strength of an annuity company when purchasing a fixed annuity.
A “CD Type Annuity” is a type of fixed annuity that guarantees a specified interest rate for a set number of years. They are also often referred to as a Multi Year Guaranteed Annuity.
When you purchase an annuity contract you are committing to leave your money there for the duration of your annuity (usually 2 to 10 years). However, most fixed annuities allow taking free withdrawals of interest earned or up to 10% free withdrawals annually (varies by annuity company and contract)
A 5 year fixed annuity is an annuity contract with a five year surrender charge schedule (CDSC). When you purchase a 5 year fixed annuity the interest rate is locked in for the initial 5 year contract period and you agree to keep the annuity for the 5 year contract term.