What You Didn't Know About Fixed Annuities

The annuity market is growing and fixed income products are becoming increasingly popular among retirement investors. A fixed annuity is a contract between you and an insurance company that will give you a stream

of regular payments for a specified period of time or until you pass away. While these contracts offer a great deal of flexibility, they also come with their own unique set of considerations. In order to make the right decision, it’s important to understand how fixed annuities work and if they’re right for you. Here are five things you probably didn’t know about fixed annuities:

Fixed annuities can be a great tool for retirement income.

Fixed annuities are often described as a ‘guaranteed lifetime income’. Annuity payments can be a great source of income for retirees, particularly those who want a reliable, consistent stream of income for the rest of their lives. However, just like anything else, there are certain risks associated with receiving income from annuities. Annuity payments are generally lower than what you would receive in interest income over the same period of time. This is why annuities are often used in conjunction with other investment types—to diversify your portfolio and help mitigate risk. The amount you receive in annuity payments each month is determined by the insurance company based on your age, health and life expectancy.

Fixed annuities have strict surrender periods.

While the appeal of a guaranteed lifetime income may sound promising, there are certain types of products that are not guaranteed to provide the income you expect. For example, a fixed annuity with a 10-year surrender period can be a high-cost, low-income retirement solution. If you withdraw money from the annuity prior to the end of the surrender period, you could face hefty surrender charges. In addition, if you need to change your investment mix as the economy changes or you want to reinvest your money into a different asset class, you may not be able to. The surrender period is the length of time you must keep the contract before you can withdraw money without penalty. A 10-year surrender period means you have to keep the annuity for 10 years before you can withdraw without penalty.

Fixed annuities come with high fees and penalties for early withdrawal.

Fixed annuities come with what is called a ‘surrender charge’ that represents the dollar amount you would be charged if you withdrew your money before the end of the surrender period. These surrender charges vary greatly between insurance companies and products. While these penalties may seem like a good reason to steer clear of annuities, they are actually a reflection of the high costs of insurance companies providing the product. Insurance companies invest the money that you deposit into the annuity and promise to pay you the same amount for the rest of your life. This is a low-return investment that is incredibly costly to the insurance company. In order to stay profitable, it is necessary for the insurance company to charge fees on early withdrawals.

You can receive payments in one of two ways: as an annuity or as a lump sum.

Annuity - If you select the annuity option, you’ll receive a steady stream of income for a specified period of time or until you pass away. If you choose this option, you’ll have to pick an annuity payment amount—the higher the amount, the more likely you are to receive the full amount specified in the contract. Lump sum - If you choose the lump sum option, you’ll receive a one-time payment at the end of the contract. You don’t know the exact amount you’ll receive, but you do know that it will be less than what you would receive if you chose the annuity option. However, once you receive the lump sum, you don’t have to worry about the income being less since you’ll have the principal amount in your account, available to you at any time.

You don’t have to buy and hold; you can also sell your fixed annuity before the contract ends.

There is another option available to you if you decide that a fixed annuity isn’t right for you: You can sell your contract. Once you decide to sell your contract, you’ll have to find a buyer and negotiate the price you’ll get for your contract. If you decide to sell your contract, make sure the buyer is reputable and you know the contract details before entering into a binding contract. When selling a fixed annuity contract, you’ll need to pay close attention to the timing of the transaction. You’ll want to sell your contract before the end of the term to get a good price for it. The longer you hold onto the contract, the less valuable it becomes. While selling your contract may be the best option for you, you need to be aware of the costs and penalties associated with the transaction.

Conclusion

Fixed annuities are a great tool for retirement income. They are often used in conjunction with other investment types to help diversify your portfolio and mitigate risk. Fixed annuities come with high fees and penalties for early withdrawal. You can receive payments in one of two ways: as an annuity or as a lump sum. You don’t have to buy and hold; you can also sell your fixed annuity before the contract ends.