Fixed annuities are annuity contracts issued by a life insurance company. The life insurance companies that issue annuity contracts generally issue other types of insurance contracts for individuals facing mortality and morbidity risks such as life insurance, disability insurance and long term care insurance. A life insurance company’s ratings for financial strength are important for fixed annuities because funds invested in fixed annuity contracts are invested in the general account which is subject to the claims of policyholders. Life insurance companies must manage the risks of general account investments and underwrite claims of policyholders.
The different types of fixed annuity contracts can be purchased by insurance licensed agents or through an internet based insurance broker. Each type of annuity is designed to meet a specific need for retirement income and/or tax deferred accumulations. The different types of fixed annuities that are available include:
- Immediate Annuities;
- Deferred Annuities; and
- Equity-Indexed Annuities.
Immediate annuities provide immediate income to annuitants for life with various payment options for joint annuitants and beneficiaries. The payments from the immediate annuity can be monthly or annual with 3% annual cost of living adjustments.
Deferred annuities declare a guaranteed rate of interest on contract balances for a rate guarantee period with a minimum annual interest rate over the life of the contract, usually 3%. The guaranteed rate periods can be 1, 3, 5, 7 and 10 years in durations. Funds invested in fixed annuity contracts are invested primarily in a portfolio of income-producing assets such as real estate, mortgages and bonds. Based on the portfolio performance and underwriting gains or losses, an interest rate guarantee is declared for the various interest rate guarantee periods which is credited to a contract holder’s account.
Equity-Indexed annuities are different than deferred annuity contracts because the interest rate credited to the account balance is linked to a stock index or basket of stock indexes. The methods of calculating the linkage between the index and interest rate credited to the annuity contract is determined by many factors including: indexing method, participation rate, interest rate cap and minimum guaranteed rate. Some index annuities have significant surrender charges with extended surrender charge periods.
It is important to determine what percentage of your investment portfolio should be invested in Fixed Annuities based on your investment objectives, risk tolerances and investment time horizon.
Investors are advised to seek competent financial, tax and legal advice concerning the decisions they make with their investments. Klayman & Toskes, P.A. can provide you with a free consultation concerning any securities industry violations related to the handling of your investments accounts by a full-service brokerage firm or registered investment advisor.
Information contained on this webpage is for educational purposes only
and should not be considered legal advice.
No Information contained on this website creates an attorney-client relationship.