Opportunities in Fixed Annuities

A fixed annuity is an annuity that guarantees a certain rate of return over a given time period. Conversely, a variable annuity does not guarantee a rate of return. There are two major types of fixed annuities that are used as savings instruments: traditional and index annuities.

TRADITIONAL FIXED ANNUITIES
Traditional fixed annuities come with a multi-year rate guarantee. For example, you are offered a pre-set rate of return for a pre-set number of years guaranteed by the issuing life insurance company. At the end of the respective terms you can cash it out, leave it in at the stated renewal rate, or roll it into a new contract with any company you choose.

Sounds like a bank CD doesn't it? There are two important differences:

1. Unlike CD's, Annuities grow tax-deferred. In other words, you don't pay tax on the interest until you actually withdraw the money. That is important because all of your interest compounds while it is in the annuity. If it is rolled into another annuity, the tax deferral continues until you actually take a check from the issuing company.

2. If you withdraw money out of an annuity prior to age 59 1/2, the gains are subject to a 10% IRS penalty. Money can be withdrawn from CD's at any age without IRS penalty.

FIXED INDEX ANNUITIES
These fixed annuity contracts provide an opportunity for higher yields with no risk due to equity index volatility. Furthermore, a minimum guaranteed interest rate is stated at the beginning of the contract so that regardless of index results, the contract owner knows they will have a positive return by the end of the initial surrender charge period.

The higher yields are based on an equity index's performance over a certain period of time (usually one or two years). The annuity owner gets a share of those gains - either a percentage or a "cap" on the growth. If the index goes down, these annuities protect the money from losses.

NOTE: As with all annuities, surrender charges do apply - so it is important to choose an appropriate length of term for your circumstances.

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