Fixed annuities
A fixed annuity pays a set interest rate for a set number of years. It is the simplest kind of annuity. The price of that simplicity is that your money is tied up for the term.
How a fixed annuity works
You pay an insurance company a lump sum, called the premium. The insurer promises to credit a stated interest rate on it. Many fixed annuities lock that rate for a set number of years, often called the guarantee period or term. These are sometimes called multi-year guaranteed annuities.
Your value does not go down when markets fall, and it does not go up when markets rise. It grows by the interest the contract states, and nothing else.
When the term ends, you usually have a window to choose what happens next:
- take the money out,
- move it to another annuity,
- let it renew at whatever rate the insurer offers then, or
- turn it into a stream of income.
Read the contract for the length of that window. If you miss it, the contract may renew automatically, sometimes with a new surrender period.
What you give up
- Access during the surrender period. A surrender charge is a fee for taking out more than the contract allows before the surrender period ends. It usually shrinks each year and then disappears. Many contracts let you take out a portion each year without the charge. The contract states how much.
- A possible market value adjustment. Some contracts include a market value adjustment (MVA). If you take out more than the free amount during the surrender period, the MVA can raise or lower what you receive, depending on how interest rates have moved since you bought. If rates have risen, it usually lowers it.
- Upside. If interest rates rise after you buy, your rate stays where it is until the term ends.
- Inflation protection. A set rate may not keep up with rising prices.
- A tax rule before age 59½. Taking earnings out before 59½ can mean a 10% IRS penalty on top of ordinary income tax, unless an exception applies.
What you get in return
- A known rate for a known time. You can see exactly what the contract credits each year of the term.
- No market losses on the money in the contract. Surrender charges and an MVA can still reduce what you get if you leave early.
- Tax deferral. Interest is not taxed while it stays in the contract. When you take it out, the earnings are taxed as ordinary income. If the annuity is inside an IRA, the IRA's tax rules apply instead.
- An income option. Most contracts let you turn the value into regular payments, for a set period or for life. The contract says when you can, and whether a surrender charge applies.
These promises are backed by the insurance company that issues the contract, not by a bank or the government. That is why the insurer's financial strength matters, and why we show each insurer's rating in full.
Who it can fit, and who it doesn't
Can fit
- You have money you will not need for the whole term.
- You already have an emergency fund somewhere else.
- You value a predictable rate more than the chance of higher growth.
- You want tax deferral on money outside a retirement account.
Often doesn't fit
- You may need the money before the term ends.
- This would be most of what you have.
- You are carrying high-interest debt.
- You need your money to keep pace with inflation over a long time.
Questions to ask any agent
- How long is the surrender period, and what is the charge in each year?
- How much can I take out each year without a charge?
- Does this contract have a market value adjustment? Show me how it would work.
- What happens when the term ends? How long is the window to decide?
- Is the rate locked for the whole term, or only the first year?
- What does the insurer pay you if I buy this? (Agents are paid by commission. You can ask.)
- What is the insurer's financial strength rating, stated in full, and as of what date?
- What is the free-look period? That is the number of days after delivery when you can cancel the contract. State law sets the length and what you get back.
We answer every one of these in writing before you sign anything.
Questions are free.
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