Fixed Annuity

What Is a Fixed Annuity?

A fixed annuity is a contract between you and an insurance company. You pay the insurer a premium, either as a single lump sum or as a series of payments, and the insurer credits interest to your account at a rate it guarantees for a set period. Because the rate is fixed, the account value does not rise or fall with the stock market. Your principal is protected by the insurer's contractual promise rather than by investment performance.

How a Fixed Annuity Works

During the accumulation phase, the balance grows at the stated crediting rate, and interest is generally not taxed until you withdraw it. Many contracts include a surrender charge period, often several years long, during which withdrawals beyond a small penalty-free amount carry a fee that declines over time. Withdrawals before age 59½ may also trigger a federal tax penalty in addition to ordinary income tax.

When you are ready to receive the money, you can take a lump sum, take periodic withdrawals, or convert the balance into a stream of income through annuitization. An income stream can be set for a fixed number of years or paid for the rest of the annuitant's life.

Advantages and Disadvantages

Advantages:

• Interest is guaranteed for the contract period
• Earnings grow tax-deferred until withdrawal
• The account value is not exposed to market declines
• Lifetime income options are available

Disadvantages:

• Rates are generally modest compared with stock investments over long periods
• Surrender charges and tax penalties limit access to your money
• Guarantees depend on the insurer's financial strength; state guaranty association coverage is limited and varies by state
• Fixed payments can lose purchasing power when inflation is high
• Contracts can be complex, so fees and terms need careful reading

Why It Matters to Investors

Fixed annuities are often compared with bank certificate of deposit products, since both offer a fixed rate over a set term. The key differences are the insurance-company issuer, the tax deferral, and the withdrawal restrictions. A variable annuity, by contrast, ties its returns to underlying investment funds and carries market risk. When evaluating a fixed annuity, investors typically look at the guaranteed rate, the length of the surrender period, the insurer's financial ratings, and any fees or riders. Rates can change, and after the guaranteed period ends, the insurer usually sets a new rate.