Annuity insurance is a long-term investment in which the investor makes up front or on-going payments, and in return gets paid interest and their principle at regular intervals for their retirement. Payments to the investor can be for life, or for a set period.
Annuity insurance can provide many benefits including unlimited contributions to a tax-deferred income stream. Annuity payments give retirees structure, and a beneficial way to plan their spending, and ensure money for life.
The most purchased type of annuity is a fixed annuity. A fixed annuity is known as the safest type of annuity insurance, providing a guaranteed protection of principle as well as a secured interest rate. It will provide, “fixed” payments at (usually) monthly intervals during the recipient’s retirement.
A fixed annuity is a widely preferred option among investors due to its protection of principal and security for retirement. There is a guaranteed return of both earnings and the principal. As well, fixed annuities can provide a higher rate of return than other common “safe investments” such as Bank CD’s or Government Bonds.
Fixed annuities can further be segmented by their payment schedule. An immediate fixed annuity provides immediate payments to the holder, as soon as the investment was made. In the US, annuity insurance investors cannot receive payments until the age of 59 and a half without penalty. Therefore immediate annuities are often used by investors already in retirement.
The second type of fixed annuity is the deferred fixed annuity where the principal amount is left to mature for a certain period of time in a non-taxable form and the interest earned is obtained on the completion of the given period.
As with all insurance and investment products, there are various drawbacks. When considering a fixed annuity, or really any investment, always ensure you’re getting both sides of the story. One concern with annuities is that they are not a very liquid investment. If you invest in an annuity and then require the money be returned before maturity, you face an IRS tax penalty, as well as possible penalties from your insurance company. Always consider your financial position and possible short-term needs, before investing in a long-term fixed annuity.
This article is an overview of a fixed annuity, but it is nowhere near a complete assessment. Always consider the financial implications, and your personal situation before making a decision on any investment or insurance product.
John C. Ryan authors articles about annuity insurance, attempting to provide investors with the information they require to assess their fixed, variable, and index annuity options.
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