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Fixed Annuities
Traditional annuities earn a fixed rate of interest and pay a fixed income.
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When you buy a fixed deferred
annuity contract, you get two promises from the issuer: a fixed
rate of return during the build-up period while your retirement savings
accumulate, and many ways to receive retirement income, including payments that
are guaranteed to continue for as long as you live.
The two promises are related. Your money in the annuity is
tax deferred until you're ready to withdraw. The
earnings rate paid on your savings, the amount you save, and the length of time
your annuity grows all determine the income you'll receive. For many people,
the certainty of a fixed rate of return is a chief attraction of
fixed annuities.
Equally important, the rate you're paid is guaranteed by the company issuing
the contract, regardless of whether interest rates move up or down.
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HOW COMPANIES INVEST
The amount you invest to buy a fixed annuity contract
goes into the provider's general account, along with premiums from other
investors and other company revenues. Because the company has such large
sums to invest, it can diversify its holdings and potentially earn a better
return
on its investment for the same investment
risk
than you could as an individual.
A potential downside of buying a fixed annuity may occur if the issuing
company gets into financial difficulties, since its creditors would have a
right to assets in the general account. Such situations aren't common, though,
in part because the insurance industry is heavily regulated and individual
companies are rated regularly.
But be alert: Companies touting fixed annuity returns that are much higher
than the rates offered by the competition may be too good to be true.
Sometimes, promises of stellar returns are a red flag that annuity money is
going into riskier investments such as junk bonds. Before buying, ask to see
the rate that the issuing company has paid over the past ten years and be
sure to check the company's ratings.
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SAFETY FIRST
Fixed annuities, sometimes called guaranteed annuities,
are generally described as safe because you can count on receiving the
specific return you're promised each year.
The guarantee is backed by the insurance company issuing the annuity, not the
government. But if you buy your contract from a highly rated company, its
financial strength and reputation stand behind your contract. Rating services
such as Standard & Poor's ,
Moody's , A.M. Best, and Fitch rank annuity providers on their overall
financial condition, which underlies their ability to meet their obligations.
These reports are available in public libraries, on the Internet, from your
financial adviser, and from the insurance company if you request it.
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© 2006 by Lightbulb Press, Inc.
All Rights Reserved.
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