A Fixed Annuity is a contract between you and an insurance company in a similar manner to how a certificate of deposit is a contract between you and a bank. The reason it is called a “fixed” annuity is that it guarantees a stated interest rate and therefore carries no investment risk (as opposed to a “variable” annuity which typically invests in non-guaranteed investments).
There are two main types of fixed annuities: immediate and deferred
An immediate fixed annuity
It is what someone purchases when they want to turn a specific asset into a series of income payments. The reason it is called an immediate annuity is that once you purchase the annuity from the insurance company, your principal is “immediately” turned into a stream of monthly income checks that last for a certain length of time (or are guaranteed for life depending on the payout option you choose).
The benefit of this type of annuity is that your income payout is guaranteed and insured by the insurance company. The negative side of this type of annuity is that while you may receive guaranteed monthly checks for a period of time (or over your lifetime), the payments are typical without inflation adjustments, and the actual growth rate that you receive on your principal during this payout is usually quite low.
Furthermore, since immediate annuities are based on guaranteed calculations from the insurance company, once you begin an immediate fixed annuity you are locking into an irreversible decision with no recovery of principal at the other end for yourself or your beneficiaries.
Deferred fixed annuity
It functions more like a certificate of deposit (CD). The money you use to purchase a deferred fixed annuity is guaranteed to receive a stated rate of return for a specific number of years. Your principal is guaranteed and insured by the insurance company, and at the end of your contract term you are able to withdraw 100% of your account value without penalty.
The benefits of this type of fixed annuity are that your money grows tax-deferred, there are no annual fees, and you are allowed to make withdrawals of up to 10% of your account value every year without penalty. This withdrawal feature can in some cases make annuities more flexible than a bond or certificate of deposit that will not allow you to access your principal. The negative side of this type of fixed annuity is that while you are allowed to take 10% out per year, you are still limited in respect to liquidity and flexibility.
