In its most basic definition, an annuity is the contract that is created between a consumer and a life insurance company when the individual pays one premium that will be disbursed to the consumer over a fixed period of time. A fixed annuity is similar to a bank CD in its mode of operation, and its rates are often competitive with those of such CDs. However, it should be noted that fixed annuities often do not guarantee a specific rate of return over the entire life of the contract. By contrast, the fixed annuity will only provide a minimum guaranteed rate and a first year introductory rate for the consumer.
After the first year of the contract has passed, the guaranteed rate of return will often be an amount that is set at the insurance company’s discretion. In general, the minimum amount of return set by these companies is 3%. These annuities may be purchased from a life insurance company or from various different financial institutions. If a consumer is interested in purchasing such a policy, it will be possible for him or her to negotiate the price of the fixed annuity. Because the monetary amounts that an annuity will yield can vary between companies, it is in the consumer’s best interest to engage in comparison shopping, rather than making a hasty buying decision.
There are two different subcategories of fixed annuities: life annuities and term certain annuities. In general, the amount of monthly payments one makes for their fixed annuity will be determined by their life expectancy. There are three primary types of life annuities for an individual to choose from: straight life annuities, substandard health annuity, and guaranteed term annuities. Of the three, straight life annuities are the most straightforward. Its primary insurance component is determined by nothing more than providing an income for the consumer until he or she dies.
The substandard health annuity is generally purchased by an individual who suffers from chronic health problems. The prices of this annuity are determined by the likelihood that the individual will pass away in the near future. The lower the life expectancy of the purchaser is, the higher the cost of the annuity will be because there is a lower likelihood that the insurance company will return a profit on the annuity. Guaranteed term annuities differ in the fact that they allow the consumer to designate a beneficiary to the annuity in the even of their passing. In the event of their unexpected death of the purchaser, the beneficiary will receive a lump sum of cash from the insurance company.
The second type of fixed annuity, the term certain annuity, is quite different from the life annuity. It will yield a specific payment per period until the end of the contract, regardless of what might happen to the purchaser over the life of the annuity. However, if the purchaser were to die before the term of the annuity is over, then the insurance company is allowed to keep the remainder of the annuity’s balance. This type of fixed annuity can be beneficial because its payout is not determined by insurance components, like the health condition; however, its primary downside is that once the term of the annuity is over, its payout ceases.
In conclusion, fixed annuities are ideal for those who are looking to obtain a stable income throughout their retirement. Additionally, they may also be used for tax deferrals and savings. In contrast, fixed annuities can be difficult to manage due to the fact that the price of the insurance components can cut into the return the purchaser might see on their annuity investment. Before investing in fixed annuities, it will behoove an individual to thoroughly educate themselves by researching the different types of annuities that are available to them.
Steven Hart writes on the topics of Annuities.