How Fixed Annuities Work And Fixed Annuity Rates

Shawn Plummer

CEO, The Annuity Expert

Fixed annuities are one of the few products that offer a fixed return for a set period of time. You may want to consider investing in a fixed annuity if you’re searching for a guaranteed rate of return for a set length of time. Fixed annuities also provide an income stream during retirement. This guide will go over the fundamentals of fixed annuities and what you need to know before investing in one. We’ll also compare today’s guaranteed fixed annuity rates so you can start putting your retirement money to work.

What is a Fixed Annuity?

A fixed annuity is an insurance contract that pays you a specific, guaranteed interest rate on the money you put in for a specified period. The interest rate is usually higher than what you would get from a savings account like a CD. Fixed annuities are often used for retirement planning.

Unlike a variable annuity, you can not lose your money to stock or bond market volatility because fixed annuities are insurance products, not investment products. 

How Do Fixed Annuities Work?

Conservative investors can buy fixed annuities with a lump sum of money or a series of payments over time. The insurance company guarantees that the account will earn a specific interest rate for a specified period. This period is known as the accumulation phase.

When the initial annuity rate period ends, the insurance company will set a new interest rate for the next rate period. This new rate is called a renewal rate. The latest renewed rate can increase, decrease, or stay the same as the initial rate.

Suppose the annuity owner chooses to start getting regular payments. In that case, the insurance company calculates how much money is in the account, the owner’s age, and how long the payments will continue. Collecting these payments begins the payout phase. The payout phase can last for several years or until the owner dies.

The account holder does not have to pay taxes on the money in the account during the accumulation phase. However, when annuity owners withdraw or annuitize the contract, they will have to pay ordinary taxes based on how much money was paid in premiums and how much that money has grown.

What Do My Beneficiaries Receive?

Unlike a life annuity, fixed deferred annuities offer beneficiaries a simple standard death benefit: the annuity’s accumulation value or the minimum guaranteed surrender value, whichever is greater.

Helpful tip: Life insurance might be a good option if you want to leave money to your beneficiaries. You don’t have to take a medical examination in some cases. Instead, get a life insurance quote to see how much it would cost you monthly. Coverage starts at $9.37 per month.

What is a Multi-Year Guaranteed Annuity (MYGA)?

A Multi-Year Guarantee Annuity (MYGA) allows a single premium payment to earn a competitive fixed interest rate, with interest accumulating on a tax-deferred basis. It also allows the collected funds to be converted into a reliable and consistent stream of income paid at a designated time in the future (optional).

A single premium multi-year guarantee annuity offers future security to clients with time to save for retirement. A MYGA can be particularly useful for anyone uncomfortable with the greater risk presented by equity investments.

Tax-deferred accumulation makes single premium deferred annuities (SPDAs) more attractive than other investments such as CDs or mutual funds, subject to current income and capital gains taxation. In addition, these annuity products accumulate interest tax-free until withdrawn as income.

What Is Guaranteed?

Deferred fixed annuities provide the greatest level of protection. All of the following are guaranteed:

  • The initial investment and any accrued interest are fully protected against loss, regardless of the insurer’s general account assets’ performance.
  • At the current interest rate established by the insurer, any outstanding amounts are credited to the cash value.
  • Credited interest will never be less than the guaranteed minimum rate stipulated in the annuity contract.

Benefits of Fixed Annuities

People who own these annuity products can benefit in a lot of ways.

  • Guaranteed Returns: The rates on fixed annuities come from the yield that the life insurance company earns from its investments. The life insurance company is responsible for paying whatever rate it has promised in the annuity contract despite market performance. This differs from variable annuities, where the annuity owner chooses the investments and therefore assumes much of the investment risk.
  • Protection From Declining Interest Rates: Once the initial guarantee period in the contract expires, the insurer can change the rate. The rate can go up or down, depending on a stated formula or how much the insurer earns from its investment portfolio. Most fixed deferred contracts include a minimum rate guarantee, protecting you from declining interest rates.
  • The account grows tax-deferred: A fixed deferred annuity is a retirement plan where you don’t have to pay ordinary taxes on the money you make from it right away. Tax deferral can be a good idea because, over time, that money compounds, and you’ll be able to use it later without paying as much in taxes. The same is true for retirement savings plans like IRAs and 401(k)s.
  • Guaranteed income payments: You can convert fixed annuity contracts into an immediate fixed annuity (SPIA) at any time and receive payments at no additional cost. In addition, payout options will give you a guaranteed payment for a fixed period of time or the rest of your life.
  • Safety of principal: The life insurance company is responsible for the security of the principal investment in the deferred annuity and for fulfilling any promises made in the contract. If something happens to the life insurance company, your money will be safe. However, unlike most bank accounts, fixed and variable annuities are not federally insured but are backed by the claims-paying ability of the issuing insurance company. This is why it is essential to only do business with life insurance companies that earn high grades for financial strength from the major independent rating agencies.

Overcoming Low Fixed Annuity Rates

Annuity interest rates are at the lowest in 10 years. Instead of earning a fixed interest rate, consider fixed indexed annuities to grow your retirement savings. A fixed indexed annuity is a type of fixed annuity that earns interest based on the performance of a stock market index such as the S&P 500 and Nasdaq. This deferred indexed annuity is guaranteed not to lose any money due to a stock market crash and locks in interest earned.

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
Deferred
Income
Annuity
Buffer
Annuity
Principal ProtectionNoYesYesYesYesNo
Access To PrincipalYesYesYesNoNoYes
Control Over MoneyYesYesYesNoNoYes
Tax-Deferred GrowthYesYesYesNoNoYes
Guaranteed GrowthNoYesYesNoNoNo
Guaranteed IncomeYesYesYesYesYesYes
Inflation ProtectionYesYesNoYesYesYes
Death BenefitYesYesYesYes/NoYes/NoYes
Long-Term Care HelpYesYesYesNoNoYes

Top 12 Reasons To Buy Fixed Annuities

  1. Guaranteed interest earning for a set period without market risk.
  2. Tax-deferral on interest.
  3. Protection from market volatility.
  4. Generates a guaranteed retirement income for life, helping your finances.
  5. Deferred fixed annuity rates offer a higher rate of return than a bank certificate of deposit.
  6. Offer a higher rate of return than a high-yield savings account.
  7. The insurance product offers access to your money without penalties.
  8. Systematic withdrawals of interest.
  9. Withdrawal charge waivers for long-term care expenses.
  10. This financial product offers a death benefit.
  11. No upfront charges or fees.
  12. Laddered annuities can help with maintaining the cost of living adjustments.
  13. Annuity payments are also tax-deferred, which allows better compounding interest than a standard CD.

How are Fixed Annuities Taxed?

Current federal law gives annuities special treatment. Income tax on fixed annuities and MYGAs is deferred, so you aren’t taxed on any interest or investment returns while your money grows in the annuity contract. Tax-deferred isn’t the same as tax-free. You’ll pay ordinary tax when you make a withdrawal, receive an income stream, or receive each annuity payment. When you die, your beneficiaries will typically owe regular income taxes on any death benefits they receive from the guaranteed annuity. You may also pay a 10% tax penalty if you withdraw any annuity payments before age 59½.

Qualified Fixed Annuities

Qualified fixed annuities have a tax status that refers to IRAs, 401k, SEP, and other employer-sponsored savings plans. Qualified plans are pre-taxed funds, so when you withdraw any funds from the account, 100% of the income you withdraw will be subject to ordinary income taxes.

The exception with Qualified Fixed Rate Annuity contracts is the Roth IRA. Therefore, all funds withdrawn from these contracts will be tax-free.

Non-Qualified Fixed Annuities

Non-qualified fixed annuities are funded with “after-taxed” money, and annuity owners are subject to paying regular income taxes on any interest credits that have yet to be taxed.

Average Fixed Annuity Rates

What is a good annuity rate? Current average annuity rates fixed can expect between 2.70% and 4.30% ranging between 2 years and ten years in length. Use our fixed annuity calculator to solve your guaranteed rate of return.

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Annuity CompanyA.M. Best RatingTermLiquidityRate
OceanviewA-2 YearsYes3.50%
GuggenheimA-3 YearsYes4.00%
CanvasB++3 YearsYes4.30%
OceanviewA-4 YearsYes4.10%
CanvasB++5 YearsYes4.30%
AmericoA5 YearsYes4.20%
MidlandA+5 YearsYes4.25%
OceanviewA-6 YearsYes4.10%
AmericoA7 YearsYes4.50%

Best 2-Year Fixed Annuity Rates

Insurance CompanyA.M. Best RatingTermLiquidityRate
AmericoA2 YearsYes3.00%
OceanviewA-2 YearsYes3.50%

Best 3-Year Fixed Annuity Rates

Insurance CompanyA.M. Best RatingTermLiquidityRate
CanvasB++3 YearsYes4.30%
MidlandA+3 YearsYes3.80%
GuggenheimA-3 YearsYes4.00%

Best 4-Year Fixed Annuity Rates

Insurance CompanyA.M. Best RatingTermLiquidityRate
OceanviewA-4 YearsYes4.10%
AmericoA4 YearsYes3.85%

Best 5-Year Fixed Annuity Rates

Insurance CompanyA.M. Best RatingTermLiquidityRate
AmericoA5 YearsYes4.20%
MidlandA+5 YearsYes4.25%
CanvasB++5 YearsYes4.30%

Current Fixed Annuity Rates

(Sorted By Interest Rate)

Conclusion

There are many types of annuities and retirement plans. However, if you are looking for a safe and stable investment option, fixed annuities may be the right choice. These insurance contracts offer high-interest rates that beat most CD options and protection from stock market fluctuations. Your money will also grow tax-deferred, meaning you won’t have to pay the tax on your earnings until you withdraw them and start receiving income. And if something happens to you before your contract matures, your beneficiaries will receive the death benefit included in your agreement. Request a quote from our fixed annuity calculator today to see how much interest you could earn with fixed annuities!

Fixed Annuity Rates

Frequently Asked Questions

What are current fixed annuity rates?

The best MYGA and fixed annuity rates are 4.50 percent for a 7-year surrender period, 4.45 percent for a ten-year surrender period, 4.30 percent for a five-year surrender period, and 4.30 percent for a three-year surrender charge period.

What is the highest fixed annuity rate?

The top fixed annuity rates, as of July 2022, are 4.30 for a five-year fixed annuity, 4.50% for a seven-year annuity, and 4.30 for a three-year fixed annuity.

What are fixed annuities paying?

Fixed annuity contracts provide guaranteed retirement income payments. With a fixed annuity contract, you make one or several payments to the annuity provider, which promises to pay you a fixed return on your contributions, no matter how markets perform.

Do fixed annuities have fees?

Fixed annuities do not charge annual fees in the traditional sense but reduce the guaranteed interest rate for a feature or benefit. Surrender charges may be imposed if annuity owners prematurely cancel their retirement plans. Additional tax penalties will incur if owners withdraw money early (before age 59.5).

Are annuities FDIC insured?

Annuities are not FDIC insured or any other federal agency. Instead, they are guaranteed by the issuing insurance company. The state’s insurance commissioners regulate fixed annuities. The State Guaranty Association (SGA) insures insurance companies. The insurance companies are also regulated by the National Association of Insurance Commissioners (NAIC). Variable annuities are regulated by FINRA, a financial industry regulatory authority.

*Disclosure: Some of the links in this article may be affiliate links. If you purchase a policy, I may receive a commission at no cost to you.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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