What are Fixed Annuities

Fixed annuities, or fixed-dollar annuities, grow at a guaranteed rate. At the beginning of the annuity contract, the insurance company and the annuity owner enter into an agreement through which the owner will pay a stated amount in premiums and the insurance company will pay a set rate of interest. While the insurance company will lock in a specified interest rate at the beginning, future interest rates will vary according to current market conditions. However, the insurance company will specify for what length of time the interest rate is good. It may be for as short as two months, or as long as five years.

Many times, the subsequent interest rates are lower than the initial rate. Generally, though, annuity contracts will have a minimum guaranteed interest rate, below which the insurance company cannot set its rate. The contract may also have a bailout provision designed to protect annuity owners. This provision states that if the insurance company sets its rates below a certain level, the annuity owner has the option of withdrawing all of his or her funds from the annuity, or may exchange the annuity without any surrender charges. Fixed annuities will pay out at a specified dollar amount to the owner for each period once the distribution period begins.

Because the insurance company is paying interest, all the investment risk is borne by the company. The assets behind fixed annuities are invested in the general assets of the insurance company, and are referred to as portfolio products. Should the insurance company become bankrupt, the fixed annuity owner becomes a general creditor of the company.

Investors are attracted to fixed annuities when the interest rate is rising because their investment is guaranteed by the insurance company, and the value won’t decline during a period of rising interest rates, as a bond’s value would. Plus, since the interest rate is rising, the insurer will be more likely to pay an increasing interest rate to investors.

Conversely, when interest rates are on the decline, investors tend to look elsewhere for returns. As the interest rate declines, so will interest rates on annuities. Although the premium amount will still be guaranteed by the insurer, it will remain static, unlike bonds whose prices will increase.