What Are Fixed Annuities And How Do They Work?
A fixed annuity gives you the stability of a fixed interest rate. Hence, it is guaranteed never to drop below a minimum interest rate. This is an interest rate determined by the company, therefore, it is on the contract when you buy the fixed annuity. A lot of people that buy C.D.’s or bonds, however, they end up moving to a fixed annuity. Therefore, they then get the tax deferral and the higher rate.
Benefits of fixed annuities could include these items below. Please also consider the items in bold font:
- Credited interest to your daily account (make sure this is the case)
- Terms are usually 3,5,7 and max of 10 years. Most advisors only recommend going 3-5 years typically.
- This interest rate should be LOCKED for the term of the contract. We do not encourage the first year rate to be extremely high before dropping the rate the next year.
- Some have a minimum of 1% after the first year. We do not support this… Be careful of these products.
- Check with your advisor on liquidity. Some insurance companies will only allow you to take a withdrawal of the interest payments. Some will allow you access to up to 10% per year and one will allow you up to 15%.
- Check that the liquidity (allowed amount you can access) could be based on the initial purchase amount (the premium) or it can be calculated off the account balance. We like the account balance, it gives you access to more.
- If you would like to pull your interest from the fixed annuity, make sure the carrier can make a direct deposit in your account on a monthly or quarterly or yearly basis.