The Compelling Payout and Performance Benefits of Fixed Annuities

Though there are almost countless types and variations of fixed annuity products, the benefits of such products are undeniable. Each variation is designed to provide a slightly different performance or safety benefit to the investor. The different aspects of these contracts are worth further exploration.

Annuity Payout Benefits

The complexities and several shortcomings dissipate when the Single Premium Deferred Annuity is "annuitized" - i.e. the accumulated funds are used to commence monthly payments to the annuitant guaranteed for life. Payments are usually monthly, but can be quarterly or even annual.

There are varieties of ways the annuitization process may be arranged, based on guaranteed cash payments for life, and/or with guaranteed payments (period certain) made even after death to named surviving beneficiaries.

The annuitized payments provide for return of principal in addition to interest, enabling the annuitized payment to be larger than a standard interest withdrawal, as well as partially tax-free through the return of principal. Selecting the manner of the payment stream is relatively complex and professional advice is recommended.

Performance Comparison

Single Premium Deferred Fixed Annuities, as evidenced by performance history, are an above average investment alternative and may consistently outperform other alternatives. Remember, however, that past performance may not be indicative of future results.

The performance of annuities may be even more compelling when their ability to defer income taxation is also considered. While U.S. government issues avoid state taxation and municipal bonds can avoid both state and federal taxation, they are also prone to price fluctuation - especially with longer term maturities.

Deferred Annuities purchased on the fixed yield basis do not fluctuate, and are guaranteed not to lose value. Deferred annuities only increase in value - through the process of interest crediting. Like all insurance products, they have the additional benefit of not being subject to probate.

Fixed Immediate Annuity

The fixed immediate annuity is one where the insurance company agrees to pay an income (generally monthly) to the annuitant. If the amount of the payment is guaranteed at the outset, this is called a "fixed" benefit. Other contracts, with payments that fluctuate based on a portfolio of securities, are referred to as "variable" annuities.

The insurance company has the assurance of the funds for a longer period with an immediate annuity since it cannot be surrendered by the policy owner. Therefore, it will base its payout on the highest current long term investments available. This is usually a higher rate than that which is credited to the current fixed accounts of deferred annuities, which can be surrendered.

Ryan Whittaker is an experienced investor and has studied extensively the pros and cons of fixed annuity contracts. For more information on the fixed annuity, visit him online at The Fixed Annuity Guide.

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