How Is an Annuity "Fixed"?

A fixed annuity is fixed in two ways: fixed investment rate and fixed payout amount. Both are guaranteed by the annuity company.

While your premiums are accumulating, your principal is guaranteed and your account is guaranteed to grow at a fixed investment rate. Your investment income grows tax-deferred.

During the payout period, your monthly income is fixed at a guaranteed amount, calculated according to your age, sex, and the payout option you select.

For example: During your accumulation period you might pay $100 per month guaranteed to grow at 5% annually. When you retire and annuitize your contract, the company might pay you a guaranteed $200 per month for as long as you live. The payout amount is calculated based upon your age at the time you annuitize and the company's assumed payout rate. A fixed annuity is very much like the old defined benefit pension plans.

This article provided by The Educated Investor and powered by CalcXML.
© 2000-2008 Precision Information LLC. All rights reserved.
Click here to license this content.