Fixed Annuity Considerations – The Many Benefits of Fixed Annuities
Fixed annuities, also referred to as tax-deferred fixed annuities, are available in many different product designs and configurations, but are at their core, a contract between an owner and an insurance company for an interest bearing policy that includes optional guaranteed income choices.
With a fixed annuity, the insurance company typically credits interest annually, but you are not required to pay taxes on the earnings until you make a withdrawal or begin receiving income payments from your contract. Because of this tax-deferral, you earn additional interest compounding on the money you’d normally have paid in taxes.
While there are numerous advantages of fixed annuities, some of the most significant are:
1) Tax-deferred interest accumulation – As previously stated, the interest earned with a fixed annuity is not subject to current taxation until it is withdrawn from the contract. This allows for a potentially greater cash buildup than if income taxes were payable on accumulating interest as earned. Also, it permits the policyholder to determine the most opportune time to withdraw funds for the purpose of minimizing taxation.
2) Competitive current interest rate – Current interest rates on fixed annuities are generally competitive with those from other fixed-interest investment vehicles, and are typically better than what can be obtained by depositing funds into a comparable bank Certificate of Deposit (CD). Please visit our Top Multi-Year Guaranteed Annuity Rates page for a summary of currently available fixed annuity interest rates.
3) Safety – The value of your fixed annuity is fully backed by the assets of the issuing insurance company. In addition, all fixed annuities are secondarily covered by your states Insurance Guaranty Association (up to certain limits). To see what the coverage limits are for your state of residence, please visit our State Guaranty Associations page.
4) Guarantees – Finally, most fixed annuities offer an initial interest rate that is guaranteed for a specified period of time, and then following that initial term, a contractually guaranteed minimum interest rate or floor, which the contract can never fall below.
Other things you should consider when comparing fixed annuities:
1) The length of the surrender charge period may be an important consideration for you. Although fixed annuities should be viewed as long-term retirement savings vehicles, knowing the number of years you’ll be committing to a particular annuity contract is certainly a valid comparison point.
2) The financial strength and stability of the issuing insurance company should be considered. You’ll want to know how long the company has been in business, its overall size and asset structure, as well as its ratings from independent rating agencies such as A.M. Best. If you are comparing several similar fixed annuity contracts, with all interest rate and other features being equal, you should lean towards the issuing insurance company with the highest ratings and strongest overall financial stability.
This article is not intended to be a complete discussion of the many fixed annuity benefits or comparison considerations, which are too numerous to fully outline in one article. If you’d like to learn more, or if you have further questions, please feel free to give us a call. Our Annuity Specialists are happy to help and will patiently answer all of your questions without the hype or any sales pressure.