The Opportunities and Risks of Fixed Annuities

When most consumers think about retirement savings, they tend to think first of 401(k) plans, IRAs, mutual funds and other more traditional investment vehicles. Most of these are offered through employers or investment firms. 

People looking for a way to grow their retirement savings without taking on a lot of risk may benefit from fixed annuities. These products are offered through life insurance companies and provide a guaranteed return on the money invested. 

In this article, we’ll discuss some of the opportunities and risks of fixed annuities so you can help educate your current and prospective insurance customers. 

Fixed Annuities Defined 

First, let’s discuss what fixed annuities are. These products are essentially long-term contracts that insurance companies back and issue. 

They provide purchasers with predictable income for the future since they guarantee growth with very little risk. People use these investment vehicles to grow their money at a higher rate than bank interest but without the high risks that some other investments such as stocks have. 

The money that is put into these accounts is often used to cover retirement essentials such as health care and housing, which are things that every person will need when they get older. 

So, instead of hoping their money will grow in other types of investment products, people can use fixed annuities to gain a return while not risking money they’ll need to pay for everyday essentials. 

The way that most fixed annuities work is that they offer a specific interest rate for a specific amount of time. People can either pay money into the accounts in one payment or even pay monthly as a premium, just like other insurance products work. 

When the end of the time period for the plan arrives, people can then choose to receive payments on a regular basis, such as monthly, for either a specified period of time or for the rest of their life. 

Fixed Annuities Opportunities 

There are many reasons why fixed annuities are attractive investment products. 

For one, the premium a person pays is protected. They can’t ever lose the money that they put into them, even if the stock market crashes. 

As such, the investment risk is taken on by the insurance company rather than the investor. Most fixed annuities also allow people to name beneficiaries who will receive the complete accumulated value of the plan when the subscriber passes away. 

Fixed annuities also offer a guaranteed return. This is due to the minimum interest rate that the plan will have right from the start. 

Earnings from these plans are completely tax-deferred. Instead of paying taxes on the money the plan earns, people only pay taxes when they make withdrawals, which gives them a chance to take advantage of compound interest. 

There are also many different types of fixed annuities, from single, joint, specific amount or fixed period, for instance. They are often used in conjunction with other types of retirement plans such as 401(k)s and IRAs, especially if a person has maxed out their annual contributions. 

Fixed Annuities Risks 

The “risks” associated with fixed annuities aren’t really risks in the traditional sense, since a person can’t ever lose the money they put in, as described above. Instead, these risks are really about missed opportunities, or downfalls of these plans compared to other investment vehicles. 

For instance, fixed annuities come with limited upside. If the general stock market explodes, for example, the fixed annuity will not grow at an accelerated rate, since the interest rate is fixed. 

Not only that, but the interest rate doesn’t adjust as the years go by. This means that these accounts may not keep up with inflation, if the rate of inflation ends up exploding higher than the interest rate on the fixed annuity. 

Unlike most bank accounts that offer interest on deposits, fixed annuities operate closer to 401(k)s and IRAs when it comes to withdrawals. The trade-off for getting tax-deferred growth is the fact that people have to pay a tax penalty of 10% if they make withdrawals from the account before they reach 59.5 years old. 

When a person does make withdrawals, that money is subject to being taxed as ordinary income. Other investment vehicles offer the benefit of lower tax rates, such as long-term capital gains taxes.  

In addition, not all fixed annuities offer the ability to leave the accumulated earnings to beneficiaries. So, when the subscriber passes away, the plan simply ends and no money is paid out. 

Not only that, but the payments may even stop before the person passes away, depending on the type of payout option that was selected. 

Help Your Customers Understand Fixed Annuities 

There are many potential benefits that fixed annuities can provide, but there are also some drawbacks. As an independent insurance agent, your job is to educate your current and prospective customers about these possible benefits and drawbacks so they can decide whether a fixed annuity is right for them. 

At Good Life Insurance Associates (GLIA), we specialize in providing support, training and tools to help make you a better independent insurance agent. We also provide a full range of insurance products from more than 100 carriers across the nation. 

To learn more, please contact us today.