About Fixed & Guaranteed Annuities
- When purchasing a fixed and guaranteed annuity, you will contract with an insurance company for the product. You pay the insurance company through regular payments or by making a lump sum payment. The annuity earns a fixed rate of return over the life of your contract. When you retire, you will start receiving a fixed monthly payment from the insurance company. This payment could continue for the rest of your life, or it could end after a specific time.
- This type of annuity is said to be guaranteed by the insurance company. This means that you will not have to worry about the returns of your investments to provide a fixed payment during your retirement years. Even though it is guaranteed by the insurance company, there is always the chance that the company could go out of business. If this happens, your state has a guarantee association that will step in and reimburse investors up to a certain amount. The guarantee may not be as much as you invested in the annuity.
- The financial ratings of insurance companies can give you clues as to how safe your annuity contract really is. Companies like Standard & Poor's and Moody's provide financial ratings on insurance companies. By choosing an insurance company that has a strong financial rating, you can significantly reduce the chances of losing money on your annuity contract. Companies with "A" ratings are considered to be the strongest and have the lowest probability of going bankrupt.
- In return for providing the annuity, your insurance company will charge you fees. Each annuity has different fees associated with it. Some annuities charge a percentage of your premium payments, while others take a certain percentage of the value every year. If you decide to get out of the annuity contract, you may also have to pay surrender fees to the insurance company. These fees will take the majority of what you have earned in returns.
- Fixed annuities can provide you with tax benefits in much the same way as other qualified retirement accounts. When you earn interest on the money you invest in the annuity, you will not have to pay taxes on it at that time. The Internal Revenue Service allows you to defer the taxes until you start receiving payments from the annuity contract. You can begin taking payments once you reach the age of 59 1/2. Then you will pay taxes on the income as it is received at your marginal tax rate.
