Before buying a fixed annuity, it is always good to know what they are and how they function. A fixed annuity is an investment vehicle that allows individuals to earn a fixed income. It is a contract between you as a purchaser of the annuity and the insurance company and its aim is to provide you with specified intervals of payments normally after your retirement. You are guaranteed both principal and earnings. The earnings from the annuity are taxed differed until the time of withdrawal. This means that as the accumulated amount in the account keeps growing there is no taxation on that amount until you decide to withdraw them. It is a safer way of investment. It also has a death benefit.
A fixed annuity will allow one to withdraw a certain amount from their account around 10% on annual basis without any annuity charges and if you withdraw in excess of the percentage you will be penalized. This is often referred to as the adjustments or surrender charges. They are guaranteed. A fixed annuity is backed by the insurance company’s assets and therefore they are safe. In most states in America, they are secondarily covered by the Insurance Guaranteed Fund. It is safer that a bond or the bond fund shares because sometimes share prices in the case of a bond fund usually fall as a response to the rise in the interest rate.
Most insurance companies that offer fixed annuity do not limit the accumulation period hence enabling you the opportunity to ensure that you assets keeps accumulating. These annuities are of importance when it comes to planning for your retirement savings and income. It offers you with an option or a method of receiving income and with this type of investment you are assured of income stream for life. The fact that they are tax deferred means that it allows your money to have the benefit of a compounding interest. Note that with annuities you will not get the additional tax advantage when funding a qualified plan.
A fixed annuity is a can Deferred annuity or Variable annuity. The difference between the two is that the fixed annuity guarantees you accumulation of your money at a specific rate of interest while in the case of a variable annuity, the purchaser of the annuity distributes his or her money in many different accounts and it is the accumulated fund that reflects the accounts experience rather than the company. The increase in the amount accumulated depends on the increase or decrease of the values of the accounts. The fixed annuities are safer than the variable annuities but with variable annuities there is a possibility for greater returns. You will find that sometimes, these fixed annuities are being marketed through brokerage firms and banks. It is, therefore, up to you to ensure that the people who are selling to you the fixed annuity are licensed life insurance agents and where it is variable annuity they must be a licensed security dealer. Take time to find out the name of the insurance company if you are buying from these sources.