What is an annuity?

An annuity is a contract between a consumer and an insurance company. It is an insurance product where the consumer makes an investment (one payment or a series of payments) designed to grow over time, and creates a lump payment or series of payments. Annuities are a popular financial source for consumers who are interested in receiving a steady income during their retirement. There are different types of annuities, and choosing the right one for you will depend on your financial goals.  Here we explore some differences and similarities between fixed and fixed index annuities.

​

Interest Rates

With a fixed annuity, the insurance company will guarantee a certain interest rate for a set period of time (generally 5-7 years). After the set period, all funds can be withdrawn or re-invested at a newly determined rate.​

​

Fixed index annuities (FIAs) will offer an interest tied to the performance of a market index, allowing the owner to earn interest based on market gains while protecting funds from market loss. FIAs have a guaranteed minimum rate applied to the duration of the contract period, generally 0-1%. Because the rate is linked to one or more indices, the interest rate will vary throughout the contract.

​

Surrender Charges

After the purchase date, a fixed annuity will typically have a declining surrender charge schedule for 5-7 years. Fixed annuities are available with a wide range of rate and surrender charge combinations.

​

The surrender charge period for fixed  index annuities is generally much greater than fixed annuities because of market uncertainty. These periods are usually 10 to 15 years. If you choose to surrender your FIA early, the surrender charges can be significant.​

​

Taxes

Non-qualified money that is invested in a fixed annuity will grow tax-deferred. When you begin to withdraw from the annuity, the amount you have contributed is not taxed, only the interest. The interest is taxed at your regular income tax rate when withdrawn. Withdrawals prior to age 59 1/2 can result in a 10% penalty tax on earned interest.​

​

Like fixed annuities, interest made on an FIA contract is tax-deferred, so you will not pay taxes on the interest until you withdraw from the account. This tax deferral will not affect taxation of Social Security benefits. ​

​

Income Options

Money invested in both fixed annuities and FIAs can be used to produce guaranteed income. Your contract will specify the period of time in which you must wait before you may begin receiving this income. With both fixed annuities and FIAs, your contract will also determine the amount allowed to be withdrawn as a lump sum, over a designated period of time, or as payments made to you for the rest of your life.​

​

These are just a few comparisons detailing fixed and fixed index annuities. As previously stated, there are many different types of annuities, and choosing which one is best for you depends on your financial goals. The financial advisors at The Irwin Agency can provide guidance in choosing which services are right for you, and tailor a plan that best suits your needs. Give us a call today to book your free consultation,  (501) 623-7066.