Why Fixed Annuities are the Easiest Type of Annuity to Buy

If you are looking for a very simple, conservative product to add to your retirement portfolio in these volatile times, look no further than fixed annuities.

Among all types of annuities, the so-called fixed version is the easiest to understand and buy. This is because the contract terms are clear, and once you’ve taken the time to learn how they work, you can purchase them online directly from an insurance company.

There’s a lot of misleading information on the web regarding annuities, their role in your retirement plan, and the risks of owning the product. Before we go into the value of fixed annuities versus the alternative annuity types, let’s review the basics of annuities.

Two Ways of Viewing Annuities

Annuities can generally be viewed in two ways:

1. When payouts begin (also called the annuitization phase)
2. How your money grows before annuitizing

When Payouts Begin

There are two versions of annuities, immediate or deferred, based on when the insurance company will begin sending a stream of income payments (essentially when you want it to begin paying you):

Immediate annuities: Also known as income annuities, this type is best for people who need a guaranteed, regular stream of retirement income now.

With immediate annuities, the owner pays the insurance company a lump sum of cash known as the premium. The company then guarantees the annuitant (the person receiving the benefit) a stream of monthly payments that last a lifetime or for a specific period of time. Annuities are the only product you can buy that guarantees you will not outlive your money (if you choose the lifetime payout option).

Deferred annuities: When you buy a deferred annuity, you are essentially purchasing a savings product. These are offered by insurance companies and help people grow their savings before retirement. Deferred annuities are for people who want to grow money over time, on a tax-deferred basis, generally before retirement.

These products “defer” the flow of monthly income until you need it in retirement. Interest rates for these products are typically much higher than traditional savings products. This is especially true today in a rising interest rate environment.

The insurance company typically guarantees deferred annuity rates for a specific number of years, known as guarantee periods. The most popular terms are three, five, and seven-year periods. Deferred annuities can be a good choice in times of stock market volatility.

How Your Money Grows Before Annuitizing

The three main types of annuities that grow your savings before annuitizing are:

Fixed annuities: The most conservative type of annuity, fixed annuities offer a fixed rate of return guaranteed by the insurance company for specific periods of time. More on this type of annuity below.

Fixed indexed annuities: A so-called hybrid product, it offers a guaranteed floor rate (usually 0% so you won’t loose money) and more upside interest rate possibility than fixed annuities, although the upside usually is capped as well. You choose an investment “index�� linked to the stock market. This index drives your returns.

Variable annuities: The most volatile type of annuity that offers the highest possible returns. Unfortunately, they can be difficult to understand, can lose money, and can be loaded with fees charged by the insurance company.

Immediate annuities do not have time to grow before annuitizing.

Features of Fixed Annuities that Make Them Easy to Buy

As we noted above, fixed annuities are the most conservative type of annuity. They offer guaranteed, competitive returns (especially compared to bank savings products and CDs). Let’s review some of the very simple features of fixed annuities.

Simple, tax-deferred accumulation of assets: When you buy a fixed annuity seeking to accumulate assets, your money grows tax-deferred. The insurance company agrees to pay you a specified rate of interest during the term you choose. It also guarantees a minimum return.

It’s that simple.

Three key things to understand about fixed annuities are how long the guarantee period is, the interest rate you will receive, and how long the surrender period lasts. More on surrender charges and surrender periods below.

A stream of income when you are ready to retire: When you choose annuitize your deferred annuity (or if you buy an immediate fixed annuity), you receive a fixed amount of money, normally on a monthly basis (similar to a pension).

These payments may last for a specified period, such as 10 years, or an unspecified period such as your lifetime or the lifetime of you and your spouse.

The Misconceptions Around Hidden Fees: What You See is What You Get

Some companies and insurance agencies use scare tactics to dissuade people from buying an annuity until they have had a chance to meet with an agent.

While this can be a good idea, especially if you are considering an equity-indexed or variable annuity, fixed annuities can be purchased without an agent due to their simple nature.

There are a lot of misconceptions floating around regarding fixed annuities. Let’s clarify the facts:

Is the advertised rate of a fixed annuity actually guaranteed to be paid?

Yes. The insurance company issuing the fixed annuity guarantees that the advertised rate will be paid for the duration of the guarantee period based on the company's financial strength.

Are there hidden fees that will reduce my interest rate?

No. Fees charged by the insurance company only come into play if you withdraw your money before the end of the surrender period. A surrender period is the period of time you commit to keeping your money with the insurance company.

Surrender charges generally decrease the longer you own the annuity. Annuities offer better rates than other savings vehicles because the insurance company has the time to invest your money to maximize your return. Other costs incurred by the insurance company, like commission paid to agents and administrative fees, are “baked in” to your rate.

Remember that annuities are long-term savings products. Only commit an amount of money to a fixed annuity that you know you won’t need for the duration of the surrender period.

Can I buy a fixed annuity without an agent?

Yes. There are a few insurance companies, including Canvas Annuity, that allow you to buy an annuity directly online. When you buy directly, make sure you get the guaranteed rate, the length of the guarantee, the surrender charges, and the surrender period in writing.

That information should also be advertised on the insurance company’s website. We advertise ours right here.

The Role Fixed Annuities Can Have in Your Financial Plan

Due to their conservative nature, fixed annuities can be a valuable element to your retirement plan. Other elements can include CDs, savings accounts, treasuries, and other guaranteed interest rate products.

Having this foundation in place allows you to be more aggressive with other money in your portfolio, whether you invest in the stock market, mutual funds, or bonds.

How to Buy Fixed Annuities

Fixed annuities can be purchased via an insurance agent or financial advisor or directly from the issuing insurance company.

Buying direct from companies like Canvas Annuity is fast and easy, and because there are no commissioned agents, the rates are some of the most competitive in the country. If you’re interested in learning more about how a fixed annuity may fit into your retirement plan, contact one of our licensed representatives today.