Fixed Annuities
A traditional fixed annuity (FA) provides for
a fixed level of interest to be credited to the contract by the insurer during the accumulation stage; and/or
a fixed, unchanging level of income to be paid out upon the contract’s annuitization.
The rate of interest crediting during the accumulation stage is declared by the insurer, subject to periodic change, and backed by a minimum guaranteed rate of return.
For example, a traditional fixed annuity could provide a 6 percent rate of return for the first two years after contract issue and a minimum guaranteed rate of 3 percent for the contract’s term. After the first two years, the insurer declares another rate of return that is to be credited to the contract. This renewal rate can be higher or lower than the initial 6 percent, but the owner is guaranteed that it will be no less than 3 percent. To distinguish the interest rate credited to the annuity from its underlying minimum guaranteed rate, the former is often referred to as the “current rate” or the “declared rate.”
A contract that is annuitized on a fixed basis will pay the same income payment for the entire annuitization period. If, for instance, 68 year-old Horace decided to annuitize his $200,000 annuity contract and selected a fixed monthly lifetime payout option, he would receive payments of about $1,250 every month for the rest of his life. Those payments will not increase or decrease, and are guaranteed by the insurer.
For a free copy of the LIMRA September 2014 Update of The Facts of Life and Annuities click here.