What is a fixed annuity?
● Fixed annuities
are investment contracts sold by life-insurance companies that earn a fixed rate of return and pay off after a specified period of time, either in periodic payments or a lump sum.
l Popular for retirement investing, fixed annuities are tax-deferred, meaning any gains accumulate tax-free until withdrawals are made. Fixed annuities are sold by insurance agents (in contrast, variable annuities, which
are based on the value of underlying securities, can be sold only by financial professionals licensed to sell securities).
Annuity glossary
l Accumulation period:
The time before an annuity's payout period when money builds up in the annuity.
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l Annuitize:
To convert the value of an annuity contract into a stream of periodic payouts.
l Deferred annuity:
A contract in which annuity payouts begin at a future date.
l Effective annual yield:
Annual return based on compounding of interest, usually on a daily basis. Any first-year interest bonuses are included.
l Equity-indexed annuity:
A type of fixed annuity which, in addition to a minimum rate of return, may earn additional interest based on the performance of an equity index, such as the Standard & Poor's 500 Composite Stock Price Index.
l Initial rate period:
The period of time, usually listed in years, that the company agrees to pay the initial crediting rate.
l Payout period:
The period during which you receive the income from your annuity.
l Principal:
The amount you pay into your annuity contract.
l Rate bonus:
A bonus interest-rate percentage typically paid in the first year of an annuity contract.
l Surrender charge:
A penalty levied against the annuity value if it is cashed in before a specific period of time called the surrender period.
l Variable annuity:
A type of annuity backed by underlying investments such as stocks, fixed-income instruments or money market accounts. Unlike fixed annuities, the principal in a variable annuity is subject to market risk and losses.
Annuity tips
● Carefully evaluate whether an annuity product is suitable for your needs, including your tax situation, before replacing one or purchasing a new one. Consult a financial professional if you're not sure.
● Be sure the salesperson you're dealing with is licensed by the Arizona Department of Insurance by contacting the agency at 628-6370 or 800-325-2548 or at www.id.state.az.us In the case of variable annuities, check the records of securities professionals with the state Securities Division at 877-811-3878 or at www.ccsd.cc.state.az.us
● Ask for and read explanatory documentation such as state-required buyer's guides, policy summaries, and notices. Ask questions and take notes.
● Shop for the best rates with the highest-rated companies, taking into account rate guarantees, bonuses and payment options. Look for rate guarantees that last at least as long as the annuity surrender period.
● Check the annuity issuer's financial ratings with firms like A.M. Best and Standard & Poor's.
● Never pay in cash and always make the check payable to the insurance company, not the agent.
● Read the contract carefully and ask follow-up questions. State law allows annuity buyers to return contracts without penalty within a 30-day "free-look" period.
Source: Arizona Department of Insurance, staff research