Fixed Annuities are primarily vehicles for safe appreciation of your money.
A Fixed Annuity has a fixed period of time, and a guaranteed rate of return that is backed by the full faith and credit of the issuing company. For this reason, choosing fixed annuities only from the strongest financial institutions is critically important.
How Fixed Annuities Work:
Insurance companies that offer fixed annuities are in the business of investing in low risk assets. They receive premiums from their policyholders, and invest those premiums in assets like commercial mortgages, bonds, and stable companies. Warren Buffett and his company Berkshire Hathaway are well-known as very successful long-term investment managers. Underlying Berkshire Hathaway’s success, however, are extensive insurance operations.
The insurance companies provide the cash that Buffett uses to invest in a wide variety of businesses. The businesses and holdings produce the cash flow necessary to pay claims or annuity payments. Buffet’s skill as an investor mean that there is significant profit above and beyond the liabilities of the insurance operations, and has made him and investors in Berkshire Hathaway extremely wealthy.
Fixed Annuity Rates:
A fixed annuity contract will have two rates. One is the guaranteed floor rate, and the other is the current rate. Based on the performance of the insurance companies investments during the course of the year, they will declare the current rate for that year. The company also guarantees that the rate will never be lower than the floor rate.
In investment cycles like we are in today with very low interest rates, the floor rate maybe 1%, and the current rate 3 1/2 to 4%. These rates vary by company and date. Please contact us for a current fixed annuity quote.
Benefits of Fixed Annuities
Investors use fixed annuities as a safe place to grow their money and protect their assets. A fixed annuity is much like a CD, except with a CD interest that accrues and is paid annually or over time is taxable when it’s paid. A fixed annuity, by contrast, can grow tax-deferred, so your interest credit from one year is accrued and compounds on itself the next year.
At the end of the fixed annuity term when you take your money out, the accrued interest is taxable, however there are IRS guidelines that allow you to roll one annuity into another and preserve your tax-deferred growth. This is called a “1035 Exchange” and by example, could be used by a fixed annuity investor to roll the accrued gains in a fixed annuity into an immediate annuity to produce income. Depending on the age of the owner and the length of time of the contracts, this simple two-step strategy can be very beneficial.
Fixed annuities can grow and compound over many years, and depending on the terms of your contract, your money can be taken out at the end of the term, or you can take a percentage of your account out each year without any penalty. Again, the amount you can take out varies by company, but generally is at least 10% of the account each year as a “Free Withdrawal”
When comparing fixed annuities to other kinds of annuity products, such as fixed index annuities and variable annuities, many investors are lured into buying options and riders that turn a regular contract into a hybrid of benefits. Buying options and riders on fixed index annuity products and variable annuities, such as lifetime income rider’s, can get very expensive. Undoubtedly, there are benefits to many of the riders, but it’s important to understand the costs fully.
“A designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away.” Antoine de Saint Exupéry
While a fixed annuity is a conservative option, there are many situations when simple is better. If safe appreciation is the goal, a fixed annuity may be better than hybrid annuities that have more complicated provisions and restrictive contract terms.