Fixed and Fixed Indexed Annuities, Explained
An annuity is a contract with an insurance company. You pay money in, and in return the contract can help your money grow on a tax-deferred basis and can turn savings into income later. This page covers the two types we discuss: fixed and fixed indexed annuities.
We don't offer variable annuities. Those are securities and require a securities registration. Joel is a licensed insurance agent, not a securities representative or investment adviser.
How an annuity works
Most annuities have two phases:
- Accumulation: you pay in, either all at once or over time, and the contract credits interest.
- Income: you can choose to receive payments for a set number of years or for life, depending on the contract. Many contracts also pay a death benefit to your beneficiaries if you pass away before the money is used.
Fixed annuities
A fixed annuity credits a stated interest rate for a set period. When that period ends, the rate may reset, but not below the minimum in the contract. Fixed annuities are often chosen by people who want predictability.
Fixed indexed annuities
A fixed indexed annuity credits interest based partly on a market index, subject to limits such as a cap, a participation rate, or a spread. A floor means credited interest won't go below a set level (often 0%) because of index declines. You aren't invested in the market. The insurance company can change caps and rates at renewal, within contract limits. Optional income riders may be available, usually for an added fee.
Surrender charges and other costs
Annuities are long-term contracts. Most have a surrender charge period, which often lasts several years. If you take out more than the contract allows during that time, you may pay a surrender charge, and some contracts also apply a market value adjustment. Many contracts allow a limited penalty-free withdrawal each year. Read the surrender schedule closely before you buy.
Taxes matter too. Earnings are generally taxed as ordinary income when withdrawn, and under IRS rules, withdrawals before age 59½ may also face a 10% additional tax. Consult a tax professional about your situation.
About guarantees
Any guarantees in an annuity, such as a minimum interest rate or lifetime income, depend on the claims-paying ability of the insurance company that issues it. Annuities aren't bank deposits and aren't insured by the FDIC.
Who may consider an annuity
Fixed and fixed indexed annuities are often considered by people nearing or in retirement who want predictable income or protection from index losses, and who have emergency savings elsewhere. They usually aren't a fit for money you may need during the surrender period.
How we approach annuity conversations
Most states require agents to act in your best interest when recommending an annuity. Before any recommendation, we'll ask about your income, expenses, savings, goals, time horizon, and any existing annuities or life insurance, and we'll explain our role and how we're paid. Moving money out of an employer plan or securities involves decisions that need a properly registered professional.
Questions people ask
Can I lose money in a fixed or fixed indexed annuity?
Index declines don't reduce credited interest below the floor. But surrender charges, market value adjustments, and rider fees can reduce what you receive if you withdraw early.
Should I replace an annuity I already own?
Be careful. A replacement can mean new surrender charges and a new surrender period. Most states require a written comparison before a replacement.
Is there a way to change my mind after I buy?
Most states require a "free look" period after delivery. The length varies by state and contract.
WEDOIT education, led by Dr. Joel M Tchafack, PharmD, a pharmacist and licensed life insurance agent in NM, CO, MD, NC, SC, TN, TX, VA and WY (NPN 19623090). Joel isn't a securities representative or investment adviser and doesn't give investment or rollover advice. WEDOIT LLC, Carlsbad, New Mexico · 575-266-3119 · info@wedoitinsurance.com
This content is for education only and isn't tax, legal, or investment advice. Consult a tax or legal professional about your situation. Availability varies by state and carrier. Features, rates, caps, and surrender schedules vary by contract. Guarantees are based on the claims-paying ability of the issuing insurance company. "PharmD" refers to a pharmacy doctorate, not a medical, legal, tax, or financial-planning credential.