What Is a Fixed-Rate Annuity?

Everyone approaching their retirement age has a common desire to retire with a stable source of income. As a retiree, fixed-rate annuities are one of the investments that involve minimal risk and can guarantee you much-needed secure earnings. Contact AnnuityAdvantage to discuss fixed annuities in depth. In this article, we’ll discuss the concept of fixed-rate annuities, and examine its pros and cons to help you know what investing in this instrument entails. 

What Is a Fixed Rate Annuity? 

A fixed-rate annuity is an insurance contract that offers buyers a definite return on their principal. The major distinguishing factor of fixed-rate annuities is that it offers a solid return on a buyer’s investment. Fixed-rate annuities are the least complex type of annuities. They guarantee an annuitant a steady stream of income with minimal risks. 

How Does a Fixed-Rate Annuity Work?

When you approach an insurance company to buy a fixed-rate annuity, you’ll be required to pay a purchase price for the plan of your choice. You can pay this purchase price as a lump sum or through several payments. In exchange for the sum you pay to the insurance company, you’ll receive your principal with a specified return after a period. 

This sum you pay to the insurance company increases by the rate specified in your contract. For example, your contract may state that your principal will increase by two percent monthly. It is a fixed-rate annuity because you know the returns to expect on your principal when signing your contract. 

The period during which your principal increases is called the accumulation stage.When the accumulation stage elapses, you may choose to receive your returns plus the principal as a lump sum or spread throughout your lifetime.

Who Should Get a Fixed-Rate Annuity?

A fixed-rate annuity is a good idea for anyone approaching retirement age who wants a reliable source of income during their lifetime. Anyone can get a fixed annuity as long as they can afford it. No one is too young to buy a fixed annuity as it is not exclusively for people approaching retirement age. 

Who Should Not Get a Fixed-Rate Annuity?

Anyone can purchase a fixed-rate annuity. But if you are very old or terminally ill, you shouldn’t buy a fixed-rate annuity. If you are within this confine, you should consider purchasing life insurance from which your loved ones can benefit. 

You should not buy a fixed-rate annuity if it’s beyond your budget. It’s best to analyze your budget to know if buying a fixed-rate annuity will cause financial problems. A good analysis will save you from borrowing or taking loans to sustain yourself. 

Advantages of a Fixed-Rate Annuity

A few advantages of a fixed-rate annuity are:

Fixed Returns

Fixed-rate annuity, as the name implies, offers you a fixed return rate on your deposit. You know the amount to expect as interest after the agreed time from the day you deposit. The returns you get on your investment are not subject to market volatility. 

Consistent Income 

Another major benefit of fixed-rate annuities is that you can get investment returns throughout your lifetime. After you retire, you will not need to take up any jobs to sustain yourself since you’ll have a steady and reliable source of income. 

Flexible Payout Period Options 

In a fixed-rate annuity, you have flexible payout options. You may decide to receive your returns at once as a lump sum or spread over some years, for example, five years. You may also opt to receive your returns monthly spread for your lifetime or jointly for your and your spouse’s lifetime. 

Low Risks 

Fixed-rate annuities involve minimal risks compared to other types of annuity contracts. Your returns are not dependent on the performance of the investment or stocks. Also, you can never outlive your income if you opt for a lifetime option because the insurance will pay you throughout your lifetime. 

The state regulates insurance companies and requires them to reserve a lot of money to pay their liabilities. So even when the insurance company goes bankrupt, your returns remain guaranteed. 

Also, Check – What to Do Right if You Miss a Mortgage Payment

Disadvantages of a Fixed-Rate Annuity

A few disadvantages of a fixed-rate annuity are:

Limited Protection From Inflation

Fixed-rate annuities provide little or no protection from inflation. In times of inflation, your return will remain the same, causing a value depletion over time. Some companies offer inflation protection, but they are often expensive. 

Low-Interest Potential

Due to the fixed nature of a fixed-rate annuity, there’s a limited possibility for a high-interest potential. Your interest remains the same even when there’s a boom in the stock market. All the benefits from a stock boom go to the insurance company.

Early Withdrawal Penalties 

In a fixed-rate annuity, you can withdraw your money anytime during the accumulation stage but with penalties. If you withdraw your money before the stipulated date, you will incur the percentage of the penalty that’s in your agreement. 

Loss of Flexibility

A fixed-rate annuity offers a flexible option where you can surrender the policy and withdraw your principal during the accumulation stage, although with penalties. This option, however, stops when you reach the withdrawal stage. When you receive your first return on your investment, you can no longer surrender the policy. 

FAQs on a Fixed-Rate Annuity

Can I Lose Money in a Fixed Annuity?

No, you cannot lose your money in a fixed-rate annuity because the contract does not allow the insuring company to invest your money in stocks and securities. Instead, you only get a specified throughout your contract duration. 

Who Bears the Risk in a Fixed Annuity? 

The insurance company assumes all the risks in a fixed annuity. Since your interest is not dependent on market volatility or stock performance, your interest remains the same even when the insurance company goes bankrupt.

Are Fixed-Rate Annuities a Good Investment? 

Yes, fixed annuities are good investments. They involve few risks and a steady income stream for your lifetime. They are also highly reliable. 

Can You Rely on Fixed-Rate Annuities?

A fixed annuity is one dependable investment that guarantees your peace of mind by providing a steady income after retirement. Choosing this annuity may be your best option if you desire a reliable investment that is not subject to market volatility.