Americans bought $125 billion of fixed annuities in 2018 to save for retirement or to receive guaranteed income for life. But nobody ever said they were simple. Have questions about fixed annuities? You're in the right place.
If you still have questions that weren't covered here, an independent insurance agent will be your ultimate resource. They're experts when it comes to annuities and can help guide you through all your options, weigh the good and the bad, and see you through it all from start to signature.
Table of Contents
Q. What Is a Fixed Income Annuity?
Fixed income annuities are also known as immediate annuities. They begin to pay income one year or less after the insurance company receives the purchase payment. There are several income options to choose from. Common options are:
- Life only: A payment is guaranteed for the lifetime of the annuitant. No payments are made after the annuitant's death. Life only options will pay out a higher monthly or annual income than the other options. Joint and survivor life only is available for the longer of two lives, usually spouses.
- Life & period certain: Payments are guaranteed for the lifetime of the annuitant. The payments are made for at least a "certain" number of years regardless of when the annuitant dies. The certain year options are usually 10 and 20. Joint and survivor options are available for life and period certain.
- Fixed period: Payments are made for specified number of years regardless of when the annuitant dies.
The most important feature of fixed income annuities is guaranteed lifetime income. Of all the concerns impacting Americans’ retirement today, running out of money, maintaining their lifestyle, and rising healthcare expenses continue to top the list according to the American Institute of CPAs (AICPA) Personal Financial Planning Trends Survey.
Q. Are Fixed Annuities Guaranteed?
Yes, fixed annuities are guaranteed. That is one of their most important features. Fixed annuities have several different guarantees.
- Account values: Guaranteed to be at least the purchase payment minus any surrender charges. Once interest is credited to the account, it cannot be reduced or taken away.
- Interest Rates: Fixed annuities have a guaranteed interest rate stated in the policy. Multiyear guaranteed annuities (MYGAs) guarantee a rate for a set period of years. The renewal rate can't be less than the guaranteed rate. Fixed indexed annuities also have a guaranteed rate, which depending on the state, can't be less than zero or one percent.
- Annuity Rates: Rates for income options are guaranteed in the policy. The actual rate used is often higher.
It's important for you to know that the guarantee is made by the insurance company, not the FDIC or other government agency. So the guarantee is only as good as the insurance company. Insurance company financial strength ratings are available from A.M. Best, S&P, Moody's, and Fitch. Each agency uses different criteria and systems for their ratings. The table below illustrates each company's ratings in terms of highest, medium, and lowest.
|Highest ability to |
|Medium ability to |
|Lowest ability to |
|A.M. Best||A++ To A-||B++ To B-||C++ To C-|
|Moody’s||Aaa To Aa||A To Baa||Ba To Caa|
|S&P||AAA To A||BBB To B||CCC To C|
|Fitch||AAA To AA-||A+ To BBB-||BB+ To CC|
Q. Are Fixed Annuities Subject to RMD?
A. Fixed annuities and other financial products by themselves are not subject to RMDs (Required Minimum Distributions). RMDs are a requirement for participants in qualified plans (401k, 403b, etc.) and traditional IRAs. Participants have to take withdrawals based on age and account balance no later than April 1st of the year following turning age 72. The withdrawal is taken from whatever investments are in the plan, whether they are fixed annuities or anything else.
Q. Are Fixed Annuities Safe Investments?
A. Fixed annuities are designed to "not lose money." Fixed annuities, however, are not guaranteed by the FDIC or any other government agency. That said, fixed annuities are only sold to the public by life insurance companies. They're regulated and monitored by the insurance department of each state they do business in. Life insurance companies have to maintain sufficient reserves to meet policyholder obligations. They also have to meet other financial standards set by the state insurance commissioner. Most states use the standards recommended by the National Association of Insurance Commissioners. Each state has a guarantee fund to reimburse policyholders if the life insurance company fails, and the limits are different for each state.
Q. What Is a Fixed Annuity IRA?
A. IRAs can be set up with a fixed annuity the same way it is set up with a brokerage account or any other investment. A fixed annuity that is set up as an IRA is called a qualified annuity. The tax benefits and requirements for an IRA that are set up with a fixed annuity are the same as an IRA set up with any other investment.
For 2020, the contribution limit to an IRA is $6,000 if you are under age 50, and $7,000 if you are 50 or older.
Q. Can I Get Out of a Fixed Annuity?
A. Fixed annuities are retirement products and are designed as longer term investments. Fixed annuities usually have a surrender charge period. During that time the insurance company will charge a fee for withdrawing more than ten percent of the account value. The charge can be substantial, in some cases ten percent reducing each year until it is zero. MYGAs usually have a surrender period that matches the rate offered, 3,5,7 or 10 years. Fixed indexed annuities typically have surrender periods of 6 to 10 years.
Some fixed annuities have a market value adjustment (MVA) provision during the surrender period. The MVA can be a credit to the surrender value, or an additional charge depending on interest rates.
Fixed annuities also have a tax penalty of ten percent for withdrawals before age 59 1/2. Borrowing from a fixed annuity, or using it for collateral can have some very painful tax consequences. The bottom line is getting out of a fixed annuity early can be financially painful. The best way to avoid that is to make sure you are buying it for the right reasons.
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