General Information on Fixed Annuities
The annuity you choose to purchase varies depending on what you want to do with the money you obtain from the annuity, and the risk you want to take. Fixed annuities are sold by insurance companies as either an immediate-fixed annuity or a deferred-fixed annuity.
Other People Are Reading
-
Definition
-
When you purchase a fixed annuity from an insurance company, the insurance company guarantees two things: First, you will earn at least the amount of money you put into the annuity, or you will earn a specific interest rate on the money you put into the annuity. Secondly, the insurance company guarantees that the annuity payments will be at least a specified minimum amount.
Types
-
A fixed annuity can be either an immediate annuity or a deferred annuity. When you purchase an immediate annuity, you pay a single premium amount, and you start to receive annuity payments one annuity period after you pay the premium. A deferred annuity is different from a fixed annuity in that it has an accumulation period. An accumulation period is a period of time in which you make several premium payments before you start to withdraw money from the annuity. The accumulation period allows the annuity to increase in value.
-
Factors Affecting Annuity Payments
-
If you invest a large amount of money in an annuity at the beginning of the contract, you receive more money each annuity payment. If the annuity's accumulation period is longer, the interest earnings on the annuity increase, which increase the amount you receive each annuity payment. A higher interest rate increases the value of the annuity, which increases the amount you receive each annuity payment. If an annuity is in force for a longer period of time, the annuity payment is smaller.
Annuity Fees
-
A front-end load is a fee paid at the beginning of the annuity contract, while a back-end load is paid at the end of the annuity contract when you withdraw the money. Front-end loads and back-end loads are designed to compensate the insurance company for the costs to issue the annuity. You are charged either a front-end load or a back-end load. An insurance company may also charge a periodic fee that is payable at certain periods of time during the contract, and it covers the insurance company's administrative expenses. A service fee is a one-time fee that is charged for specific annuity services.
Taxation
-
If an annuity is a qualified annuity, it receives favorable tax treatment. A qualified annuity is an annuity that is part of your retirement plan. You do not have to pay tax on investment earnings until you start to withdraw money from the annuity. A non-qualified annuity does not receive favorable tax treatment, and the investment earnings you receive on the annuity are taxed when you earn the money.
-
