Fixed annuity products are safe, risk-free financial products that can support your financial portfolio as you continue to age. Income from a fixed annuity contract is stable, reliable, and never subject to change. To begin searching for a product that supports your financial needs, you’ll need to review fixed annuity rates and determine what term length might be appropriate for your situation. If you aren’t sure what an annuity is or how it works, this article is here to help.

What is an Annuity?

An annuity is a financial product that supports your investment portfolio, particularly as you approach or enter retirement. This product is essentially an agreement between an investor and an insurance company. However, an annuity, strictly speaking, is not an investment. Instead, it’s a contract with an insurance company. Each contract features a term, length of time, and interest rate. The individual agrees to pay the insurance company a set amount of money upfront when purchasing the product. In return, the insurance company provides the individual with regular payments that essentially serve as income.

If you buy a fixed annuity, you’ll receive all the money you paid to the insurance company back over the contract’s term, plus additional financial compensation equal to the interest rate. Where annuity products can vary is in terms of this interest rate. In addition, the length of the annuity’s period can often affect this rate of return. A fixed annuity refers to an annuity agreement where the interest rate added to each payment does not change at any point in the product’s lifespan.

The payments involved with a fixed annuity are guaranteed so that the purchaser knows exactly what they will get by the end of the set term. On the other hand, a variable annuity product offers the individual a more-risk more-reward agreement, where the interest rate can change based on the successes of the insurance company’s investment portfolio. The right annuity for a specific individual depends significantly on your age, the assets of your investment portfolio, and the necessity of a stable income.

Key Benefits of a Fixed Annuity

Fixed annuities come with a significant range of benefits for anyone seeking a safe approach to increasing their financial health and security. The fixed interest rate associated with the product means the insurance company can offer certain guarantees that you won’t find with traditional investment products or variable annuity contracts.

Stable Income

Fixed annuities offer the purchasing entity a stable income throughout the contract term, whether it’s three years or ten years. The interest rate never changes, which means the payment amount never varies. For this reason, a fixed annuity is a safe financial product for individuals seeking to generate stable income that they can depend on for continuing living expenses entering retirement age. This fixed income stream is usually an excellent addition to more traditional investment options, as long as you have the ability to pay for the financial contract with the insurance company before the term begins. Payouts typically occur on an annual basis, though the terms of your annuity product may differ depending on the provider.

Options for Beneficiaries

If you’re purchasing an annuity, you don’t necessarily have to be the entity that receives the payments. The terms of this financial product typically allow you to name a beneficiary other than yourself, which means you can provide family members or other individuals with either an immediate or delayed source of income. Many purchasers work with annuities in conjunction with writing a will, as these products provide the beneficiary with financial means without paying out the entire inherited sum at a single time.

A death-benefit provision accompanying the annuity product can also allow you to name a beneficiary for the product in the event that you are no longer able to receive the payments. These provisions are usually of increasing importance as the length of the annuity term increases. While a ten-year annuity might offer the highest payment rates, you’ll need to check life expectancy figures as well before purchasing. Unfortunately, this is usually necessary to ensure you don’t lose money by signing on the dotted line.

No Financial Surprises

When you purchase a fixed annuity, you’ll know exactly how much income to expect every month or year of the term. With a fixed interest rate, there are no changes to the policy of the product mid-way through the term and no associated risks in conjunction with the success or failure of the provider insurance company. No investment products, insurance contracts, or annuity selections can offer the same guarantees as a fixed annuity.

Drawbacks of a Fixed Annuity

So what’s the downside of a fixed annuity? For many individuals, it might be too conservative an approach to ensuring the security of their financial wellbeing. However, the primary reason not to get an annuity involves the terms of withdrawal. It can be costly and challenging if you need to get your money back from an annuity contract before the term expires.

Most annuity contracts come with a fee that applies in the event of withdrawal, but certain products may not allow you to get any money back. For this reason, it’s essential to ensure your financial wellbeing from other means before purchasing in the event that your expenses change unexpectedly due to concerns such as medical expenses or a shift in living conditions.

For many, the rate of return associated with a fixed annuity might be too low, primarily because there are no risks accompanying the product. However, this is rarely a concern because the fixed annuity should stand alongside your higher-risk investments rather than as your sole device for increasing your financial health. For many, an annuity is simply a safe method for combating inflation. In addition, the money you put into an annuity at the start is tax-deferred. A reliable annuities provider, along with your financial advisor, can provide you with the information you need to determine whether an annuity is a suitable financial product for you.