Fixed Annuities

Fixed Annuities

Annuities are financial products offered by insurance companies. Clients invest their savings in annuities to guarantee income for a specified period of time to supplement retirement or social security benefits. Guaranteed income intervals may range from 5 to 30 years on lifetime annuities. Clients provide insurance companies with the desired investment amount. Insurance companies determine how long the investment will provide an income for the client. Monthly payments will be made to the client for a specified period of time.

Fixed annuity rates are based on low risk investments, typically government securities or corporate bonds. By contrast, variable annuities may yield a greater return. However, the investment involves a higher risk because the interest rates vary based on securities. Clients purchase a fixed rate annuity to guarantee their rate of return or interest rate will never decrease during the lifetime of the annuity. Fixed annuity rates vary based upon the maturation period of the annuity and the amount invested. Fixed rate maturation periods may be 1, 3, 5, 10, or 15 years.

For example, clients may invest less than $100,000 in an annuity that will reach maturation in 1 year. This annuity may yield 3.17 percent upon maturity. Clients investing more than $100,000 in an annuity may expect yields of 4.19 percent in 1 year. Annuities with fixed annuity rates for 5 years or more may have a smaller yield of 2.2 percent. Smaller interest rates account for inflation and the total amount collected over 5 years. Interest rates vary from insurance company to insurance company. Individuals should verify the rates prior to investing.

Deferred Annuities

Fixed annuity rates provide clients with a safe investment and guaranteed income, while deferring taxes. The annuity savings are not taxed until the money is withdrawn. When an annuity reaches maturation, clients have two options. The money can be withdrawn on a monthly basis as income or clients can reinvest the money into another annuity or financial product. During the maturation period, some insurance companies allow the withdrawal of interest or a percentage of the principal. The amount varies, so clients should demand clarification of all details prior to investing

Penalties

If the client withdraws the funds under the age of 59 ½, the client will suffer a 10 percent penalty. If the client withdraws funds after the age of 59 ½, the client will be responsible for taxes on the interest earned.
Insurance companies also penalize clients a percentage for withdrawing funds before the maturation period. The penalties differ based upon the insurance company.

Immediate Annuities

Immediate annuities with fixed annuity rates allow clients to begin receiving monthly income immediately after an investment is made. In this scenario, the client does not have to wait for the security to reach maturation before withdrawing income. Immediate annuities are tax-deferred; however, clients must pay taxes on monthly income received. The interest rates remain fixed despite immediate withdrawal.

Lifetime Annuities

Clients with fixed rate lifetime annuities receive a fixed annuity rate over a lifetime. Insurance companies allow clients to pay higher premiums to ensure the client's income will continue after the their savings have expired. If the client dies, a beneficiary can receive any funds remaining in the account.