Fixed Annuity Information and Help

A fixed annuity is an investment product sold by a financial institution , usually an insurance company, which provides a guaranteed return on an investment, and allows the earnings on that investment to accumulate on a tax-deferred basis.

An annuity is a contract between an individual and an insurance company, in which the insurance company accepts – and invests – money from an individual for the purpose of creating a stream of tax-deferred earnings. Fixed annuities are not securities.

Unlike Certificates of Deposit (CDs) which are backed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account or Treasury Bills (T-Bills) which are backed by the full faith and credit of the U.S. Government, the only protection for an annuity is the financial strength of the insurance company that issued it. Annuities should only be purchased from highly-rated insurance companies.

There are two primary companies that rate insurers for this purpose:

A.M. Best Company

Oldwick, New Jersey

(908) 439-2200

ambest.com Look for a rating of at least A-

Standard & Poor's

New York City

(212) 438-2000

standardandpoors.com Look for a rating of at least AA

The Advantages of Being Tax-Deferred

The earnings of a fixed annuity accumulate tax-deferred; they are only taxed when they are distributed, and are then taxed as ordinary income. A portion of each distribution includes a return of your principal, and that portion is not taxed.

Annuities may be funded with a lump-sum payment or with regular contributions. There is usually no limit on the amount that can be contributed.

Liquidity

Most annuity products allow you to take out up to 10% of the value each year without any penalty. If the reason for the withdrawal is related to disability, terminal illness or nursing home confinement, you may be able to withdraw the entire value of the annuity without penalty.

There may be surrender charges associated with early withdrawal when it is not for a permitted reason. They are generally assessed on a sliding scale, based on the age of the annuity. For an investment held for just one year the surrender charge may be 6% of the value of the annuity. For an investment held for six years, the a surrender charge may drop to 0%.

Estate Protection

Most annuities will skip probate and simply pass directly to the investor's heirs. Annuities often include a death benefit, so a beneficiary is normally designated as part of the purchase contract. Note also that annuities are also generally protected from creditors.

Settlement Options

Annuities usually last for a fixed period of time, for example 5, 10 or 20 years. At the end of that period, you can choose from a variety of settlement options, options which will determine what happens with your money, Here are some choices:

As with any contract or legal agreement, an annuity is filled with legal terms.

A few important ones include:

• Issuer – The insurance company that accepts the premiums and makes payment of the benefits
• Owner – The person who funds the annuity and receives disbursements
• Annuitant – The person whose life-span determines the payment shcedule of an annuity
• Beneficiary – The person who received any remaining benefits after the death of the owner.

In summary, a fixed annuity offers:

• safety for the principal
• competitive rates of return
• tax-deferred accumulation of earnings
• no up-front costs
• liquidity
• guaranteed death benefit
• control of income and timing of taxes