Guaranteed for Contract Period
2, 3, 5, 7. 10 Years
Insurance Company Balance Sheet
70 Billion
A Fixed Annuity is very similar to a Certificate of Deposit (CD), which is another conservative financial product. They both offer a specified interest rate for a for a specified period, often ranging from one to ten years.
There are some notable differences:
Interest Rate Guarantee:
Fixed Annuity: Offers a guaranteed interest rate set by the insurance company for a specified period, often ranging from two to ten years.
CD: Provides a fixed interest rate agreed upon at the time of purchase for a specific term, which can vary from a few months to several years.
Issuer:
Fixed Annuity: Issued by insurance companies.
CD: Typically issued by banks or credit unions.
Liquidity:
Fixed Annuity: May have restrictions on liquidity, and early withdrawals could result in surrender charges. Some annuities offer penalty-free withdrawals up to a certain limit.
CD: Generally allows for minimal or no access to funds before the maturity date without incurring penalties. Early withdrawal penalties may apply.
Tax Treatment:
Fixed Annuity: Earnings grow tax-deferred, and taxes are paid when you withdraw income. This can be beneficial for individuals in higher tax brackets. They are taxed on a LIFO basis. Note, there may be a 10% penalty of the taxable portion if withdrawn before age 59.5.
CD: Interest earned is subject to taxes in the year it is earned. There is no tax deferral.
5.90%
5.75%
5.80%
Cap, Par
5, 7. 10 Years
Insurance Company Balance Sheet
Interest not taxable within policy years unless withdrawn where it is taxed as ordinary income. There may be an early withdrawal penalty if taken out before age 59.5
1 Year Point-to-Point
3 Year Point-to-Point
A Fixed Indexed Annuity (FIA) can be viewed as a market-based investment vehicle that offers principle protection. Interest credits to the account are based on the performance of an underlying index such as the S&P 500®. The products typically have several crediting options to match your time horizon, market view and risk tolerance.
Crediting Method:
The two most popular crediting methods of a FIA are Cap Rates "Cap" and Participation Rates "Par". Some products offer both crediting strategies for you to choose from. You are typically welcome to do a combination of the two.
Cap Rate:
The cap rate represents the maximum limit on the interest rate that can be credited to the annuity, regardless of how well the linked market index performs.
Investors should be aware that if the market index outperforms the cap rate, the annuity's credited interest will be capped at that predetermined rate.
Participation Rate:
The participation rate determines the percentage of the market index's gains that will be used to calculate the interest credited to the annuity.
For example, if the market index experiences a 10% gain and the participation rate is 80%, the annuity would be credited with 8% (80% of 10%) as interest.
It provides a way for investors to participate in a portion of the market upside while still offering some downside protection.
Liquidity:
Varies by product. Some common options:
No Liquidity
RMD Only
5% or 10% Free Withdrawal
Tax Treatment:
Earnings grow tax-deferred, and taxes are paid when you withdraw income. This can be beneficial for individuals in higher tax brackets. They are taxed on a LIFO basis. Note, there may be a 10% penalty of the taxable portion if withdrawn before age 59.5.
