Whether you’ve learned about annuities before or it’s your first time hearing about them, it’s important to first understand the basic concept and one of its simplest forms. In general, an annuity is a financial product that provides a steady stream of income over time. Sometimes for a standard form of an annuity—a fixed annuity—that period is the remainder of your life. There are different types of annuities, but in this blog, we’ll focus on fixed annuities.
A fixed annuity is a type of annuity that guarantees a fixed interest rate for a specified amount of time. This means that you will receive a fixed amount of money at regular intervals, typically monthly, quarterly, or annually. The insurance company that issues the annuity invests your money in conservative, low-risk assets such as bonds and certificates of deposit. The interest earned on these investments is used to pay out your annuity payments. It’s important to note that all guarantees are subject to the claims-paying ability of the insurer. Guarantees apply to minimum income from annuity and do not guarantee an investment return. Lifetime benefits are often an additional rider.
How does a fixed annuity work? Well, let's say you have $100,000 that you want to invest in a fixed annuity. You purchase the annuity from an insurance company, which promises to pay you a fixed interest rate on your investment. The interest rate is typically higher than what you would earn in a savings account or a CD, but often lower than what you would earn on a good year in the stock market.
Usually, after fees have been deducted from the principal, the insurance company then invests your money in a mix of bonds and other investments deemed to have a low risk. The interest earned on these investments is used to pay out your annuity payments. The amount of your annuity payments depends on several factors, including the size of your investment, the length of the annuity, and the interest rate.
Because fixed annuities provide a guaranteed stream of income, they can help supplement your social security income and can be a workable replacement for the lack of a pension, and are backed by the financial strength of the insurance company that issues them. Additionally, fixed annuities may have lower fees than some other investment products, which means that more of your money goes toward earning interest and providing you with income.
Fixed annuities can be a good choice for those who want a guaranteed stream of income in retirement. They offer a fixed interest rate for a set time or for life. If you are considering a fixed annuity, be sure to do your research and choose an insurance company with a strong financial rating.
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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.