Contracts or products that pay out a set rate of return are known as Fixed Annuities. They are issued by insurance companies and pay a fixed interest rate of return once the payout period begins for the entire term. This is different from a Variable Annuity, which pays a fluctuating amount. Investing in fixed annuities can be rewarding for those looking for a guaranteed rate of return over the life of the contract.

In a fixed annuity contract, the insurer guarantees a specific rate of return to the investor. The insurance company assumes the risk vs a variable annuity, which the investor carries most of the risk.

Similar to variable, the units purchased are called accumulation units and are bought throughout the contribution period. Once the payout begins, they are converted to annuity units. The number of units and the payout interest rate is fixed.

The competition for these investing products is usually in other fixed income areas, such as bonds. Fixed annuity investments are made by the insurance company and they are held in the general account of that company. There is no separate account for these products. The rate of return is set based on the fixed income securities bought by the insurance company. These investments are usually Bonds.

Immediate

These plans will pay out the investor as soon as it has become annuitized. This means that the payout period can begin and will continue for the full term. An immediate fixed annuity will begin payment right away. The investor is not deffering the payments till later.

In the case of annuity payments received under a fixed annuity, determination of the tax-free portion involves the calculation of an exclusion ratio. The exclusion ratio is then applied to each periodic income payment until the entire investment in the contract is recovered tax-free. Periodic income payments received after the entire investment in the contract is recovered are fully taxable.

Indexed Annuities

For the consumer, annuities products whose term renewal interest rates depend on a declaration by the insurer contain a certain “trust me” element. In other words, the contract owner is being asked to trust that the insurer will continue to credit competitive interest rates in renewal years. While many insurance companies offer consistently competitive interest-crediting rates, the owner is still being asked to rely on the actions of the insurer over which he or she has no control. Since the insurer is not required to declare a current interest rate that is in excess of its very low guaranteed rate, there is no assurance that it will. Furthermore, a contract owner who is dissatisfied with the insurer’s interest-crediting rate and chooses to surrender his or her contract may be required to pay a surrender charge.

Using interest crediting rates when investing that are based on an index that is outside of the insurer’s control effectively removes this reliance on the actions of the insurer. This is the foundation of indexed annuities.Indexed annuities can be tied to either an interest index or an equities indexed.

Company

There are many companies that specialize in these products and plans. They include:

AIG

Allstate

ING

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