What is a Fixed Annuity?

Last week, I wrote about the basics of annuities. Today, I’ll concentrate on fixed annuities.

Fixed Annuity (Flickr)

A fixed annuity is an investment in any of a variety of low-risk option that allows your money to be paid back to you at regular intervals. Depending on the market, other types of annuities may actually shrink your investment, so if you desire security for your money and regular payments to you from your annuity, a fixed annuity is the way to go.

Fixed annuities can be purchased from financial institutions and insurance companies with either a lump sum payment or an agreement for periodic payments on the part of the annuitant. Periodic payments are common for workers who want to save for retirement since they can contribute a certain portion of their paycheck with ease.

The money in the fixed annuity receives a certain return, the rate of which is fixed upon the purchase of the annuity. The time before you start to take payments from the annuity is called the accumulation phase, and once you start to receive payments, or the annuitization phase, the money still in the annuity after payments continues to grow.

When the person holding the annuity dies, the value of the annuity generally goes to the company that sold the annuity. The annuitant can avoid this by choosing a term certain fixed annuity instead of a life annuity, which means that the money will be paid out over a certain term, whether or not the annuitant is still living. This means that the money may be paid out in full during the life of the annuitant or that the payments could continue after his or her death to a spouse or child.