Fixed Annuities

Investment Management

Feb 19, 2020

Fixed annuities are very similar to CD’s.  Generally speaking, you agree with an insurance company to leave your money there for a period of time in return for a fixed annual rate of return.  The return and safety of your money are guaranteed by the insurance company.  Terms range anywhere from 3 years all the way up to over 10 years.  The average timeframe is 5 to 7 years.  Some offer a fixed rate for the life of the contract.  Others offer a higher rate for a period of time and then a new rate to be assigned each year for the remainder of the contract subject to a guaranteed minimum rate.  The interest earned is tax deferred, which can be an attractive benefit for your non-IRA money.  Tax deferred is not tax free. Tax deferred means that the interest accumulates in the contract and you pay taxes on it when you withdraw from the contract.  Your principal is not subject to taxes since it is money that you already paid taxes on. 

Like all investments, there are some drawbacks to look out for with Fixed Annuities.  One major issue is surrender charges.  The penalties for closing the contract early are high.  They can be as high as 10% of the contract value.  There are some exceptions to avoid surrender charges, but they aren’t really situations you want to be in. They include death, going into a nursing home or having a terminal illness.  Most annuities also allow you to withdraw the interest without penalty and many allow you to withdraw up to 10% of the contract value without penalty each year. 

The other thing to look out for with Fixed Annuities is when there is a high rate in the beginning.  You should pay careful attention to the details surrounding the rates offered to you after the initial high rate.  I often refer to the upfront rate as a “teaser” rate.  It sounds very attractive and makes you comfortable with the investment.  However, if you get a high rate for a year and commit your money for 7 years, you better understand how the interest rate will be determined in the subsequent years and what the minimum rate is.  The best way to evaluate it is to assume you get the minimum for the remaining years and then decide if the average annual return would be acceptable to you. 

A Fixed Annuity may be appropriate for someone who is very conservative and does not have the risk tolerance for stocks and bonds.  They can be an attractive alternative to CD’s for people who are looking for better rates and have the time to tie their money up.  Investing is about risk and reward.  With that said, Fixed Annuity rates are not paying incredible rates that will make you jump out of your seat to sign the contract.  Generally speaking, they will offer rates that are competitive with CD’s.  You have to weigh how much the safety is worth to you in potential lost returns by purchasing a fixed annuity.  It can certainly be a viable option for your safe money, especially if you are tax sensitive.  My final thought with Fixed Annuities and all annuities is that if it sounds too good to be true, it probably is. 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information.

The views and opinions expressed herein are those of the speaker or writer and do not necessarily reflect the views of Alliance Wealth Advisors, LLC. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Diversification does not guarantee a profit or protect against loss in a declining financial market.

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