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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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