Annuity Insurance: An Introduction to the Fixed Annuity

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 is used for retirement. There are a number of benefits to annuity insurance, but the often most noted benefit is that annuity investments are tax-deferred by the government. You are able to invest as much as you’d like in annuities (unlike 401k’s) and you will not pay taxes on gains until you start withdrawing your investment.

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 provides investors with security against the on-going fluctuations of the marketplace. Negative gains are taken out of the equation, leading to a positive, steady cashflow at set intervals for retirement. On top of the security, fixed annuity investors receive tax-deferred interest, at a rate that is often higher than other “safe” investments such as CD’s or low-risk 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.

A deferred annuity is the only option available for investors below 59.5 years of age. This annuity gathers interest on money invested at the pre-agreed fixed amount for a number of years until the owner is at 59.5 years old. No tax will be paid until withdrawals are made.

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.

A fixed annuity can be right for many people’s retirement, however, it’s not right for everyone. Always consider all the implications before making a major long-term financial decision.

John C. Ryan writes articles regarding annuity insurance, attempting to provide investors with the info they need to examine their fixed, variable, and index annuity options.