Fixed Annuities Explained

Annuities are a form of contract issued by Insurance companies and offered through Insurance brokers. The investor pays into the annuity, and after a set period of time, the annuity pays the investor income. With fixed annuities, the principle is guaranteed. Annuities offer a safe, tax-deferred way to accumulate wealth, and are very popular as retirement savings plans.

You can purchase a fixed annuity either with one lump sum payment or in installments. The traditional fixed annuity offers regular growth that does not rely on external, volatile factors such as stock market values or equity growth funds. Their return is in the form of regular interest payments compounded within the policy or made to the annuity owner.

There are several ways to structure annuities, varying the duration of the accumulation period, the length of payments, and other factors. One option is fixed annuities, which offer security to the investor. With fixed annuities, the issuing company guarantees a minimum interest rate to the policy holder for a set period of time. Often, there is a minimum benefit paid out as well. This way, the investor knows exactly what income to expect for the entire duration of the contract.

There are options for how fixed annuities are paid out. With immediate payment annuities, the investor makes a lump sum premium deposit and immediately receives fixed monthly income payments. This is a good way for an individual to turn a lump sum into a retirement income stream.

With deferred payment annuities, investors have an option of either depositing a lump sum which accumulates interest over time, or make payments into their annuities, with the maturity value being paid out after a fixed time. This is a form of investment which is popularly used as a retirement savings plan to fill the income gap created after leaving regular employment.

- Gary Denison

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