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Explaining Types of Fixed Annuities

Fixed annuities help to stabilize income from investments and are most commonly used

by people who are not fully participating in the workforce, are about to retire or are

retired. Fixed annuities are insurance contracts that offer the annuitant – the person

who owns the annuity – a set amount of income paid at regular intervals until a

specified period has ended or an event has occurred. There are advantages and

disadvantages to purchasing a fixed annuity, and there are many types of options that,

for a fee, can be added to a basic fixed annuity.

How Do Fixed Annuities Work?

Fixed annuities can be bought from insurance companies or financial institutions with

a lump-sum payment (usually most of the annuitant’s cash and cash-equivalent

savings), or they can be paid for on a periodic basis while the annuitant is working.

The money that is invested in the annuity is guaranteed to earn a fixed rate of return

throughout the accumulation phase of the annuity (when money is being put into it).

During the annuitization phase (when money is being paid out), the balance invested,

minus payouts, will continue to grow at this fixed rate. In some cases, however,

annuitants don’t live long enough to claim the full amount of their annuities. When this

happens, they end up passing the remainder of their annuity savings to the company

that sold it to them. But whether the annuitant chooses to try to avoid this depends on

the kind of policy purchased.

When you are considering purchasing a fixed annuity, it is important to remember that

you can often negotiate the price of these products. Also, the amount of money that an

annuity will pay out varies (sometimes greatly) among the financial intermediaries

selling these products, so it’s best to shop around and avoid making quick decisions.

The two main types of fixed annuities are life annuities and term certain annuities. Life

annuities pay a predetermined amount each period until the death of the annuitant,

while term certain annuities pay a predetermined amount each period (usually monthly)

until the annuity product expires, which may very well be before the death of the

annuitant.

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