The fixed annuity is best suited for a conservative investor who wants to know exactly what the rate of return will be on his or her investment.
With a fixed annuity, the premium you pay earns a specified rate of return over a guaranteed period–most often ranging from 1 to 10 years. At the end of the contract term, a new rate is declared, and you may rollover your contract for another specified period.
Both the money you invest and the interest paid out are guaranteed by the claims-paying ability of the insurance company–they are neither government nor FDIC insured.
Characteristics of Both Fixed and Variable Annuities:
- Growth of investment earnings is tax deferred.
- Earnings are taxed at your ordinary income tax rate.
- Money withdrawn before age 59½ may be subject to a 10% premature distribution tax penalty.
- Death benefit proceeds avoid the costs and delays of probate.
- Many flexible payout options are available for providing income upon retirement, ranging from a set amount of time or as long as you and/or your spouse live.
- A free cancellation period–also known as a “free look” period–allowing you to change your mind and cancel the policy within a certain amount of time.