Arvest Education Center

Mistake: Not Understanding Fixed Annuities

Attaining your desired retirement lifestyle is usually best accomplished by using all the financial tools at your disposal. Your retirement plan and IRA help provide the foundation for that nest egg. Another tool you may want to consider is a fixed annuity.

What is a fixed annuity?

A fixed annuity is a contract issued by a life insurance company. You provide the insurance company with a sum of money and the insurance company guarantees to pay periodic fixed amounts over time. The earnings within the annuity accumulate on a tax-deferred basis until you begin to receive withdrawals. With a fixed annuity, the insurance company usually guarantees a rate of return for a specified period with the rate being adjusted after an initial period.

Review the details

  • Initial rate guarantee. Compare the initial rate guarantee to other investment options such as government bonds and tax-exempt bonds. Be sure to understand how long the initial rate will last. Some policies offer very attractive rates that only last for a short time.
  • Subsequent rate resetting. After the initial rate period, the insurance company will reset the rate. Check to determine what its prior rate-setting policy has been.  Usually, companies adjust the rate based on interest rates at that time.
  • Fees or commissions. Most fixed annuities are sold without a commission charged to the buyer. The insurance company pays the salesperson and recoups that cost out of their earnings on managing your funds. Do not be afraid to ask the salesperson what he or she will receive.
  • Surrender charges. Fixed annuities should be thought of as long-term commitments. Even though in most cases the insurance company is paying interest on your whole investment, there are costs associated with the contract they plan to recover over time. The contract should spell out how long any surrender charge will last for early withdrawals.
  • Insurance company. Be sure the insurance company is financially sound and that it has a good customer service history. You want to make sure the company will be able to fulfill its guarantees. You should be able to get a ratings report from the salesperson or at the public library.

Summary

Fixed annuities can be a valuable part of a total financial strategy, but they are not for everyone. They offer the benefit of tax deferral and come with the guarantee of the insurance company. Be sure to investigate all of the details before purchasing an annuity. Compare the rates, understand all the charges and make sure the insurance company is financially sound.

This content has been provided by Financial Wisdom and is intended to serve as a general guideline.