If you wish to make your money grow over time, you should know about an investment instrument called the fixed annuity. A fixed annuity is an investment option offered by insurance companies. Within the insurance market, you can find several other variations of annuities like a variable annuity, life annuity, or indexed annuity. Among these, the fixed annuity remains one of the most popular choices for individual investors.
An annuity is a contract between an investor (policyholder)
The fixed annuity is an investment option that allows policyholders to deposit premiums into an insurance contract and grow their funds tax-deferred at a preset and guaranteed interest rate over time. At some point in the future (usually during retirement), the policyholder has the option of annuitizing their contract to receive a series of income payments over a specified period, or for their entire lifetime. Once annuitized, the interest rate and monthly payment amount are fixed for the duration of the payment term. These are the main characteristics of a fixed annuity.
In the case of a fixed annuity, a guaranteed interest rate is set at contract issue and you will keep receiving this guaranteed rate for the term specified in the policy. Many investment professionals compare a fixed annuity to a bank Certificate of Deposit (CD). However, because annuities are not issued by banks, they are not covered by Federal Deposit Insurance (FDIC). Another important benefit regarding annuities is that they usually offer the opportunity for tax-deferred growth. In other words, income taxes are deferred and are only paid when the interest earnings are actually withdrawn, and not while they grow and compound.
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