Financial products don't get simpler either. Today annuities have so many options and choices, it's not easy for anyone to keep up with the details. But today's phones still connect you to someone on the other end, and annuities still build retirement wealth and income. And while you won't see many dial phones these days, simple fixed annuities are still a popular product.
Independent agents are there to make things simpler for you. They’ll help guide you through all your options, weigh the good and the bad, and even see you through it all from start to signature. See, easy, isn’t it?
What's a Simple Fixed Annuity?
Annuities are policies issued by insurance companies. Simple fixed annuities have two insurance features: lifetime income and death benefits. Simple fixed annuities that are used to accumulate money are called deferred fixed annuities. They're also known as MYGAs (multi-year guaranteed annuities). MYGAs usually offer interest rates that are guaranteed for 3, 5, 7 or 10 years. Some are flexible, and contributions can be made anytime. Others only accept a one-time contribution called a single premium.
Simple fixed deferred annuities are a way to accumulate money for retirement with little or no risk. The insurance company guarantees the principal and a minimum rate of interest. Interest is credited each year to the account value. Once the interest is credited, it cannot be reduced or taken away.
Immediate fixed annuities are also known as fixed income annuities. That's because the insurance company begins to pay an income immediately after receiving a purchase payment, or premium. The insurance company guarantees the payout for life. Immediate fixed annuities have several options for income:
Guaranteed Income Options
|During Lifetime||At Death||Advantages||Disadvantages|
|Life ||Pays income for annuitant’s life||None||Highest income |
|No refund of unused principle|
|Life and 10 Years Certain||Pays income for life |
Not less than 10 years
|Balance if death occurs before the end of 10 years||Protection for beneficiaries|
|Life and 20 Years Certain||Pays income for life |
Not less than 20 years
|Balance if death occurs before the end of 20 years||Protection for beneficiaries|
|Life wIth Cash Refund||Pays income for life. Payments are at least the specified refund amount||Balance of refund amount||Protection for beneficiaries|
|Period Certain||Pays Income for a specified number of years||Balance of payments||Useful for certain planning purposes||Outliving income|
|Joint & Survivor 100%||Pays income for|
longer of two lives
|No further payments at 2nd death||Surviving spouse continues to receive income for life|
The accumulations in a deferred fixed annuity can be turned into a fixed income annuity at any time.
What Does "Fixed" Mean When It Comes to Annuities?
The reason that fixed annuities are called fixed is a bit confusing. The value of fixed annuities is measured in dollars. When the value of a fixed annuity rises or falls, it's because there are more or fewer dollars in the account.
On the other hand, the value of variable annuities is represented by units. The value of each unit rises and falls with the investment it represents. The account value of a variable annuity rises and falls based on the value of the units, not because there are more or fewer units.
The Tortoise and the Hare: To Each Their Own Type of Annuity
The main reason to buy a simple fixed annuity is that they're predictable. Simple fixed annuities are the tortoise of financial products. They're designed to "not lose money." They pay a predictable rate of interest and guarantee you income for life, based on account values that are promised by the insurance company.
There are two reasons to buy a MYGA instead of a CD. MYGAs are tax-deferred and you only pay tax on the interest when the money is withdrawn. MYGAs also tend to pay higher rates of interest than CDs. On the other hand, CDs are guaranteed by the FDIC, an agency of the federal government. MYGAs are guaranteed by the insurance company. The guarantee is only as good as the financial strength of the insurance company.
These days most companies don't provide pensions. For the most part, it's up to retirees to figure it out for themselves. A fixed income annuity is a way to buy a pension and create guaranteed lifetime income for one or two lives. A fixed income annuity will usually create more income than other types of lower-risk investments. The tradeoff is that when you buy a fixed income annuity, you are exchanging a purchase payment for income. You don't have access to the principal as you would with other investments.
Variable annuities, on the other hand, offer the benefits of higher returns. Over the long term, they are likely to outperform fixed annuities, but they have investment risk. And sometimes the losses can be painful. Think 2008-2009, when the stock market lost 50% of its value.
The Tortoise Doesn't Always Win, But It Does Always Finish
If you retired in 2009 on $100,000 of income, you need $119,000 today to buy the same things. Inflation is one of the biggest financial challenges that retirees face. If investment returns don't keep pace, retirees (and everyone else for that matter) actually lose money in terms of purchasing power.
Investments that have lower risk, like simple fixed annuities, also produce lower returns that may lose ground to inflation. Still, Americans buy a lot of fixed annuities. In fact, they bought $125 billion worth in 2018.
Buying a Simple Fixed Annuity: Pros, Cons, and Things To Consider
Simple fixed annuities are financial tools. Whether they are right for you depends on the job you want them to do. Here are some things to think about.
Simple fixed annuities are guaranteed by the insurance company. Be sure the company is reputable and financially strong. A.M. Best, Moody's, S&P, and Fitch all publish financial strength ratings for insurance companies. These ratings are a measure of the company’s ability to meet policyholder obligations. The chart below breaks each agency's ratings into high, medium and low categories.
|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|
Simple fixed annuities offer a low-risk alternative to CDs. A MYGA can work very well if you are nearing retirement and have concerns about losses in the market.
Simple fixed income annuities can guarantee an income for life. Do you want a fixed guaranteed income for life instead of income that may benefit from market returns? Are you willing to give up access to the principal in exchange for a lifetime income?
Tax-deferred growth is a major benefit of simple fixed annuities. Is tax control important to you? Can you benefit from tax-deferred growth?
MYGAs have surrender and tax penalties. Do you have adequate resources for emergencies and other short-term needs?
The Benefits of an Independent Insurance Agent
Fixed annuities can be an important part of your retirement plan. While they have many features and benefits, they are not for everyone. Annuities are complex, and searching through options can be confusing, time-consuming and frustrating. An independent insurance agent's role is to simplify the process. Talk to an independent insurance agent. They can help you decide if a fixed annuity is right for you.