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Let’s first consider what fixed annuity contracts involve. These contracts are typically sought when a person retires or is thinking about future retirement. He or she knows that a source of regular income will be required. The insured will either prepay a lump sum or pay over a set period of time, so that one day this money is returned to him. The two phases are referred to as the accumulation and distribution phases of an annuity.
During the accumulation phase, the money earns a rate of return or a ratio of money is gained that will be paid out in regular installments. Annuity payments can begin “immediately” (as in an immediate contract) or paid at starting point in your future.
The Value of Fixed Annuities
So why not just squirrel away some money under your mattress if you are paying the insurance company now and getting the money back later? For two primary reasons: interest and tax deference. Interest is self-explanatory; besides that, the money that grows in your account is tax deferred. This means you cannot be taxed until you start withdrawing money from your account. You also often get a 10% return on your money.
Fixed annuities act like a hedge funds against inflation. Some investors actually prefer to purchase an annuity plan, believing it will help teach financial discipline. After all, it is so easy to waste money today and suffer tomorrow. Having an annuity guarantees some funds will be at your disposal.
A fixed annuity is one of several options, as are variable and equity-indexed annuities. Fixed annuities are the best options for people who don’t like to gamble with their hard earned dollars. The rate of interest that is paid is fixed and guaranteed to remain the same, and so poses virtually no risk for you. When you begin collecting payments, your payments are fixed at a certain amount and with a preset amount of interest. This plan can certainly help insureds who have problems pacing themselves over time, so that their money lasts.
Major Factors That Determine Rate
Understand that the insurance companies do not simply store your money for this type of contract. They actually invest your money into options like high rated bonds, which get a lower return but remain stable. If the investments are increasing, the rates that are paid on the fixed annuity increase as well.
The duration of the payout can also affect the rates. If a 92-year-old person purchases an annuity, then statistically speaking, he or she will receive a better rate than someone who is 52. The interest rates are partly based on the insured’s projected life span. This may appear to be “insensitive” thinking, but this is just a matter of numbers. Your chosen insurance company has to make a profit in order to stay in business. If a person’s time left on earth is obviously limited, this will influence the interest rate, because the insurance company has a general time frame of contract.
Your interest rate can also be influenced by time, namely, the time it takes to pick up the annuity, and the length until payout, whether it long term or short term. There is a “floor,” also called a minimum interest rate, which is required for fixed annuity contracts. This simply means that your annuity cannot be credited with less than the decided base rate, and this is regardless of other changing factors. The base rate can be paid based on the performance of qualified investments.
Take Time to Consider Your Annuity Contract
If you think a fixed annuity is right for you then it is best to talk to an insurance agent that is able to answer all your questions in detail. Make sure you understand all terms and conditions before agreeing to any type of investment or contract.
Choosing the right insurance company for your fixed annuity is very important, as all the security rests in the financial health of the company. Looking into a company’s rating using third-party companies like A.M. Best or Moody’s before signing a contract is certainly a wise move. You can also contact your state’s Department of Insurance and look at their record. For example, have you examined the company’s good claims payout record? What are people saying about the company’s interest rates online?
A fixed annuity is a guaranteed contract that returns payment to the insured at a “fixed rate” and for a fixed period of time. These insurance products are well worth the investment of time to learn, since they will someday give you peace of mind and help you live in financially security. You can retire knowing that you and your loved ones will be well taken care.
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