Fixed Annuities
Fixed annuities provide guaranteed interest rates and predictable returns. They are the most conservative type of annuity and are popular with risk-averse investors seeking stability.
How Fixed Annuities Work
In a fixed annuity, the insurance company guarantees a minimum interest rate and assumes all investment risk.
Key Characteristics
| Feature | Description |
|---|---|
| Interest rate | Guaranteed minimum rate, with current rate often higher |
| Investment risk | Borne by the insurance company |
| Account growth | Predictable and guaranteed |
| General account | Funds invested in insurer's general account |
| Principal protection | Guaranteed (subject to insurer solvency) |
Interest Rate Structure
Guaranteed Minimum Rate
All fixed annuities have a guaranteed minimum rate—the lowest rate the insurer will ever credit:
| Aspect | Description |
|---|---|
| Rate level | Typically 1%-3% (varies by contract and state) |
| Duration | Guaranteed for life of contract |
| Purpose | Protects owner from rate dropping too low |
| State regulation | Minimum rates may be set by state law |
Current (Declared) Rate
The current rate (or declared rate) is what the insurer is actually crediting:
| Aspect | Description |
|---|---|
| Rate level | Usually higher than guaranteed minimum |
| Duration | May change periodically (annually or more often) |
| Factors | Based on insurer's investment returns and competition |
| Not guaranteed | Can decrease (but not below minimum) |
Bonus Rates
Some fixed annuities offer bonus rates:
| Type | Description |
|---|---|
| First-year bonus | Higher rate in year one to attract buyers |
| Premium bonus | Percentage added to initial premium |
Exam Tip: Bonus rates often come with longer surrender periods or higher fees. Evaluate the total contract, not just the bonus.
Types of Fixed Annuities
Traditional Fixed Annuity
| Feature | Description |
|---|---|
| Rate renewal | Interest rate declared annually |
| Rate adjustments | May change each year |
| Flexibility | Most common type |
Multi-Year Guarantee Annuity (MYGA)
A MYGA guarantees a fixed rate for a specified period:
| Feature | Description |
|---|---|
| Rate guarantee | Locked in for 3, 5, 7, or 10 years |
| Similar to | Bank CD, but tax-deferred |
| Rate level | Often higher than traditional fixed annuities |
| At period end | Renews at then-current rates or can surrender |
Example: MYGA Rates (2025)
| Term | Approximate Rate |
|---|---|
| 3-year | 4.5% - 5.0% |
| 5-year | 4.75% - 5.25% |
| 7-year | 5.0% - 5.5% |
Rates vary by insurer and change with market conditions.
Interest Crediting Methods
Fixed annuities credit interest using different methods:
Portfolio Rate Method
| Aspect | Description |
|---|---|
| How it works | All contracts earn the same current rate |
| Advantage | Simple to understand |
| Disadvantage | New money may dilute returns for existing owners |
New Money Rate Method
| Aspect | Description |
|---|---|
| How it works | Rate tied to when premiums were received |
| Advantage | Returns reflect actual investment environment |
| Disadvantage | More complex; different "buckets" of money earn different rates |
Tiered Interest Rate
| Aspect | Description |
|---|---|
| How it works | Different rates based on account balance or time |
| Example | First $100,000 earns 4%; amounts above earn 4.5% |
General Account Investments
Fixed annuity funds are invested in the insurer's general account:
Typical General Account Investments
| Investment Type | Purpose |
|---|---|
| Bonds (corporate and government) | Provide stable income |
| Mortgage-backed securities | Yield and diversification |
| Commercial mortgages | Long-term yield |
| Real estate | Diversification and inflation hedge |
| Stocks (limited) | Growth component |
Why This Matters
- General account investments are conservatively managed
- Insurance company guarantees returns regardless of investment performance
- Owner has no investment decisions to make
- Backed by insurer's claims-paying ability
Fixed Annuity Considerations
Advantages of Fixed Annuities
| Advantage | Description |
|---|---|
| Guaranteed returns | Know minimum earnings in advance |
| Principal protection | No risk of investment loss |
| Simplicity | No investment decisions required |
| Tax deferral | Earnings grow tax-deferred |
| Predictability | Easier retirement planning |
Disadvantages of Fixed Annuities
| Disadvantage | Description |
|---|---|
| Lower growth potential | May not keep pace with inflation |
| Opportunity cost | May underperform market investments |
| Surrender charges | Limited liquidity during surrender period |
| Interest rate risk | Locked in if rates rise after purchase |
| Insurer credit risk | Depends on insurer's financial strength |
Suitability Considerations
Fixed Annuities May Be Suitable For:
| Profile | Why Fixed Annuities May Fit |
|---|---|
| Risk-averse investors | No investment risk |
| Those near retirement | Stability and income focus |
| Conservative savers | Predictable growth |
| CD alternatives | Better rates with tax deferral |
Fixed Annuities May NOT Be Suitable For:
| Profile | Why Fixed Annuities May Not Fit |
|---|---|
| Young investors | Long time horizon favors growth |
| Those needing high returns | Growth potential limited |
| Investors comfortable with risk | May prefer variable products |
| Those needing liquidity | Surrender charges limit access |
Key Takeaways
- Fixed annuities guarantee a minimum interest rate and protect principal
- The insurance company bears all investment risk
- Funds are invested in the insurer's general account
- MYGAs lock in rates for multiple years, similar to CDs
- Interest crediting methods include portfolio rate and new money rate
- Fixed annuities offer stability but limited growth potential
- Best suited for risk-averse investors and those near retirement
In a fixed annuity, investment risk is borne by:
A Multi-Year Guarantee Annuity (MYGA) is most similar to:
Fixed annuity funds are invested in the insurance company's:
The guaranteed minimum rate in a fixed annuity:
15.3 Variable Annuities
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