By Kelly Robinson, Spring 2016 Student Intern
In the world of annuities, the most common an investor can choose between are fixed, variable, or indexed annuities. As mentioned before, annuities are complex products so we’ll explore each in a separate blog post, starting with fixed annuities today.
The word “fixed” in “fixed annuity” refers to the fixed amount of periodic payments and the fixed rate of interest the insurance company will pay you as your annuity grows. The fixed amount of periodic payments can be either specified, such as for 20 years, or unspecified, like for the remainder of your life and that of your spouse (for an extra cost). The fixed rate of interest refers to the “fixed” minimum interest rate the company pays out. “Fixed” can sound a little misleading, because it is possible for the rate to change after a set (“fixed”) period of time. The prudent investor will want to examine the contract to explain if, how, and when this would happen.
A fixed annuity is more predictable than a variable annuity by removing the market risk that a variable annuity carries, making the fixed annuity a valuable tool for the investor who wants a guaranteed income. Even though the fixed annuity is more predictable, that does not remove all the risk. The product is only as strong as the insurance company that issues it. It’s important to conduct research and make sure that the company will still be in existence and able to pay when the payout date comes around. The National Association of Insurance Commissioners will allow investors to research different companies as well as providing easy access to your state’s insurance commissioner, which tends to have listings that are more complete.
As mentioned in an earlier blog post, “The Good, The Bad, and The Money,” annuities can carry surrender charges (early withdrawal penalties) and additional fees, so it can become a costly issue if an investor needs to tap into his funds within the surrender period (which can last for several years). Investors who want to access their money in a shorter period of time should consider investing in a certificate of deposit (CD), which is set up similarly, but has much shorter surrender periods (6 mos. – 2 years).