Fixed Annuities

Shawn Plummer

CEO, The Annuity Expert

What is a Fixed Annuity?

A fixed annuity is an insurance contract that guarantees a specific interest rate on the contributions made by the account owner.

Unlike variable annuities that offer rates based on investment performance, fixed annuities provide a fixed rate determined by the insurance company. This type of annuity is often used in retirement planning and offers tax-deferred growth until the owner begins receiving income from the annuity.

Related Reading: Compare Fixed Annuity Rates

Fixed AnnuitiesInsurance ContractsGuaranteed Interest RateVariable Annuities
Provide a guaranteed interest rateStructured as insurance contractsOffer a fixed rateRate based on investment performance
Used for retirement planningProvide tax-deferred growthBenefit from predictable returnsSusceptible to market fluctuations

Fixed annuities offer stability and peace of mind, as the account owner can rely on a guaranteed interest rate regardless of market volatility. The insurance company assumes the risk and promises a steady return on investment. This can be particularly advantageous for those who prioritize predictable income in their retirement years.

The table above highlights the key differences between fixed annuities and variable annuities, emphasizing the guaranteed interest rate feature of fixed annuities. It demonstrates the advantages of a fixed annuity’s fixed rate compared to the potential fluctuations of variable annuities based on market performance.

Key Takeaways

  • Guaranteed Growth: Fixed annuities offer a guaranteed interest rate and predictable investment returns.
  • Tax-Deferred Growth: The tax-deferred status allows for compounded growth.
  • Principal and Interest Protection: Offers minimal investment risk but still provides growth opportunities at set interest rates, generally higher than bank CDs.
  • No Market Risk: It guarantees interest rates without exposure to market fluctuations.
  • Annuitization is optional: At the end of a fixed annuity’s term, the owner can withdraw or transfer the funds without annuitizing the contract.
  • Systematic Withdrawals of Interest: Options are available to receive payments monthly, quarterly, semiannually, or annually.
  • Guaranteed Income for Life: Through annuitization, individuals can convert their fixed annuity into a guaranteed income stream for life (optional).
  • Flexibility: If you choose to annuitize your contract for lifetime income, there are different payout options available.
  • Lower Investment Minimums: They usually require only $5,000 to $10,000 to start.
  • Beneficiary Protection: Assets can be passed to beneficiaries, avoiding the probate process. Optional riders can enhance the amount beneficiaries receive.
  • No Upfront Sales Charges or Administrative Fees: Once the contract is issued, 100% of your money will begin earning interest.
  • Less Opportunity for Growth: Without market participation, growth opportunities are minimal compared to variable annuities, but there’s also less risk.
  • Inconsistent Rates: Some rates are fixed for a period of time and may drop afterward.
  • Interest May Not Keep Up with Inflation: This could result in a loss of buying power over time.

How Do Fixed Annuities Works

A fixed annuity is a type of financial product typically used for retirement savings or income. It’s offered by insurance companies and is designed to provide a guaranteed income stream, either immediately or in the future. Here’s how it works:

  1. Initial Investment: You make a lump-sum payment or a series of payments to the insurance company. This money is called the principal.
  2. Accumulation Phase: If the annuity is deferred, your money accumulates interest over a period of time. The interest rate is fixed, meaning it won’t change for the duration of the annuity contract. This provides a predictable growth of your investment.
  3. Distribution Phase: Once the annuity contract reaches its maturation date, the funds can be withdrawn in a lump sum, transferred to another investment, or the annuitization phase begins, and you start receiving payments. These payments can be structured in various ways:
    • For a set period (e.g., 10 years)
    • For the rest of your life
    • For the rest of your and a spouse’s or another person’s life
  4. Guaranteed Income: One of the key features of a fixed annuity is the guarantee of a fixed income. The insurance company promises to pay you a specific amount on a regular schedule. This amount is based on the initial investment, the interest rate, and the length of the payment period.
  5. Tax Benefits: The money in a fixed annuity grows tax-deferred, meaning you don’t pay taxes on the interest earnings until you start withdrawing the money.
  6. Surrender Charges: If you withdraw money from an annuity before a certain period (usually within 5 to 7 years of purchase), you may have to pay a surrender charge. This is a type of penalty for early withdrawal.
  7. Death Benefit: Many fixed annuities include a death benefit. If you pass away before you start receiving payments, your beneficiary will receive a specified amount, typically at least the amount of your initial investment, in a lump sum.

Helpful Tool: Fixed annuity calculator

Fixed Annuity

Types Of Fixed Annuities:

  • Fixed Income Annuities: Fixed income annuities provide a steady income, typically monthly, for a set period or for life.
  • Fixed Deferred Annuities: With these deferred annuities, your money grows at a fixed interest rate until you decide to start withdrawals.
  • Fixed Indexed Annuity: Fixed index annuity returns are based on a specific market index or an interest rate declared annually but with the safety net of a guaranteed minimum return.
  • Long-term Care Annuity: Long-term care annuities double or triple the initial investment amount to pay for long-term care expenses.
  • Multi-Year Guaranteed Annuities (MYGAs): MYGAs earn a predetermined fixed rate of interest for several years. It’s a bit like having a CD (Certificate of Deposit) but in an annuity form.
What Are The Types Of Fixed Annuities

Fixed Annuity Example

A fixed annuity example involves an individual depositing a lump sum of money with an insurance company. In return, the insurer guarantees a fixed interest rate for a specified period. For instance, if someone invests $100,000 in a fixed annuity with a 3% interest rate for 10 years, they will receive $3,000 annually until the term ends.

Fixed Annuities Pros And Cons:


  • Guarantees: Your principal and interest rates are guaranteed.
  • Fixed Payment: You know exactly how much and when you’ll receive it.
  • Tax Deferral: Your investment grows tax-deferred until withdrawal. The IRS taxes the withdrawals at ordinary tax rates.


  • Liquidity Issues: Early withdrawals can result in penalties.
  • Inflation Risk: Fixed payments might lose purchasing power over time.
  • Limited Growth: Returns can be lower compared to riskier investments.
What Is A Fixed Annuity

Who Needs a Fixed Annuity?

Fixed annuities are best for:

  • Almost Retired or Retired People: These folks use fixed annuities to ensure they have a steady “paycheck” even when they’re no longer working. It helps them manage their bills and enjoy retirement without worrying about money all the time.
  • People Who Don’t Like Risks: Some individuals don’t want to gamble with their savings. Fixed annuities are safe and reliable, so there’s no day-to-day worry about losing what you’ve put away.
  • Planning for Future Health Needs: As people get older, they might need extra money for medical care. Certain fixed annuities help cover these costs, so individuals don’t have to stress about health expenses eating up all their savings.
  • Saving on Taxes: With fixed annuities, you don’t pay taxes immediately on the interest you earn, so your money can grow faster. You’ll only pay taxes when you start taking money out.
  • Anyone Wanting Steady Income: Fixed annuities offer a set amount regularly for those who like knowing exactly how much money they’ll have coming in. It makes budgeting simpler.
  • Wealthy Individuals Planning for Family: Some people with a lot of assets use fixed annuities to pass on money to their family members while getting tax benefits.

Financial Strength of Annuity Issuers

When considering fixed annuities, it’s important to evaluate the financial strength of the issuers. All of these companies have been around for at least 95 years, and all have a financial rating of A or better by 3 of the industry leaders for financial ratings: AM Best, Fitch, and Standard and PoorWhen assessing fixed annuities, evaluating the issuing companies’ financial stability is crucial. Each of these organizations has a history spanning at least 95 years and holds a financial rating of ‘A’ or higher from three leading financial rating agencies: AM Best, Fitch, and Standard and Poors.

Company NameOur Recommended ProductFoundedAM Best RatingFitch RatingStandard and Poors Rating
Lincoln National Life Insurance CompanyLincoln MYGuarantee Plus1905AA+A+
Nationwide Life Insurance CompanyNationwide Secure Growth1929A+AA+
North American Company for Life and HealthNAC Guarantee Plus1886A+A+A+
American National Insurance CompanyPalladium MYG1905AAA
Midland National Life Insurance CompanyMNL Guarantee Pro1906A+A+A+

Evaluating the financial strength of these annuity issuers is crucial to ensure the security and stability of your investment. By choosing a reputable insurer, you can have peace of mind that your fixed annuity is backed by a financially strong company.

Comparing Fixed Annuity Products

Lincoln National Life Insurance Company

Lincoln offers the MYGuarantee Plus, a single premium deferred annuity featuring a market value adjustment. This annuity requires a minimum single premium of $10,000, applicable to both non-qualified and qualified plans. It allows for an annual withdrawal of up to 10% of the accumulated value. Additionally, it provides an option for systematic withdrawals, offering flexibility in accessing funds.

Nationwide Life Insurance Company

Nationwide Life Insurance Company presents the Nationwide Secure Growth, a Single Premium Deferred Annuity that includes an optional market value adjustment feature. This financial product necessitates a minimum contract amount of $10,000. It offers the benefit of a 10% free withdrawal annually, allowing policyholders to access a portion of their funds without penalty each year

North American Company for Life and Health

North American Company for Life and Health introduces the NAC GuaranteePlus, a single premium, multi-year guarantee annuity that offers penalty-free withdrawals. Starting from the second contract year, policyholders are allowed to withdraw amounts equal to the interest earned in the prior contract year without facing any penalties.

American National Insurance Company

American National Insurance Company offers the Palladium MYG, a single premium deferred annuity that includes a market value adjustment feature, although it is not available in some states. This annuity requires a minimum initial contribution of $5,000, applicable to both qualified and non-qualified funds. Policyholders have the advantage of withdrawing interest earnings starting in the first contract year. From the second contract year onwards, they are allowed to withdraw up to 10% of the accumulated value, providing flexibility and accessibility to their funds.

Midland National Life Insurance Company

Midland National Life Insurance Company offers the MNL Guarantee Pro, which allows for certain withdrawals without penalties. From the first anniversary of the contract onwards, you are permitted to make withdrawals without penalty, specifically the amount of interest that was earned in the preceding contract year. This single premium product necessitates a minimum investment of $20,000 and is available for both qualified and non-qualified funds.

How Does A Fixed Annuity Work

Penalty-Free Withdrawals and Required Minimum Distributions

Fixed deferred annuities provide account owners with the flexibility of penalty-free withdrawals each policy year, allowing them to access a certain percentage of the account value. This feature enables individuals to have readily available funds for unexpected expenses or other financial needs.

However, it’s crucial to understand the rules and limitations surrounding penalty-free withdrawals. Most fixed deferred annuities impose a surrender charge or withdrawal restriction if the amount withdrawn exceeds the allowed limit. Surrender charges are fees incurred for early withdrawals within a specific period, typically ranging from six to ten years.

In addition to penalty-free withdrawals, account owners must also be aware of required minimum distributions (RMDs). RMDs are the minimum amount that must be withdrawn from a qualified retirement account, including fixed deferred annuities, once the account owner reaches the age of 73 (or 70 ½ for those born before July 1, 1949) according to IRS regulations.

The purpose of RMDs is to ensure that individuals begin withdrawing funds from their retirement accounts and pay taxes on the distributions. If an account owner fails to take the required minimum distributions, they may be subject to substantial tax penalties.

When determining the amount of the RMD, various factors are considered, such as the account owner’s age, the account balance, and life expectancy. An annuity calculator or financial advisor can assist in calculating the required minimum distribution amount.

It’s important for account owners to have a clear understanding of both penalty-free withdrawals and required minimum distributions to effectively manage their fixed deferred annuities. By being aware of these rules, individuals can make informed decisions regarding their financial planning and ensure compliance with regulations.

Fixed Annuity Death Benefits

The death benefit in a fixed annuity ensures that if you pass away, your investment doesn’t go to waste. Instead, the money can go to your loved ones. They can get it all at once as a lump sum, or as a series of payments. If you leave behind a spouse, most annuities even let them continue the annuity to extend any tax implications via the spousal continuance provision. This feature offers peace of mind, knowing your investment can support your family even after you’re gone.

Example: If you have a fixed annuity worth $500,000 and you pass away, your chosen beneficiary would receive the entire amount without any complications.

Fixed Annuity Example

Next Steps

Fixed annuities are a secure financial tool, offering steady income during retirement and a safety net for your family through the death benefit. With perks like stable payouts, tax benefits, and long-term care options, they’re a smart addition to any financial plan. Ready to strengthen your financial future? Request a quote to see how fixed annuities can work for you.

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Frequently Asked Questions

How much do I need to invest in a fixed annuity?

The amount needed to invest in a fixed annuity varies based on factors like desired monthly income, interest rate, and investment period. Consult a financial advisor for personalized advice tailored to your needs.

Are fixed annuities taxed?

Fixed annuities grow tax-deferred, meaning you don’t pay taxes on earnings until you make withdrawals. At withdrawal, the interest portion is taxed as ordinary income. Principal contributions are not taxed.

What are the risks associated with fixed annuities?

Fixed annuity risks include the credit risk of the issuing insurance company, inflation risk reducing real returns, and liquidity risk due to early withdrawal penalties. They also may have lower average returns compared to other investment options. Always read contract terms carefully.

Can you cash out a fixed annuity?

Yes, you can cash out a fixed annuity, but doing so often incurs penalties known as surrender charges. You’ll also likely owe taxes on the earnings. Some annuities have specific conditions or periods for penalty-free withdrawals. Always review contract terms before cashing out.

What are the characteristics of a fixed annuity?

A fixed annuity provides guaranteed interest rates, offers tax-deferred growth, ensures principal protection, and can deliver consistent income payments in retirement.

Can I lose money in a fixed annuity?

No, you cannot lose your principal in a fixed annuity; it guarantees your investment and provides a set interest rate, protecting you from market downturns.

Do I have to take a series of payments in a fixed annuity?

You can choose a lump sum or series of payments in a fixed annuity, depending on your contract’s terms and personal financial needs.

Who bears all of the investment risk in a fixed annuity?

In a fixed annuity, the insurance company bears the risk, guaranteeing your principal and a set interest rate regardless of market fluctuations.

Does fixed annuities allow withdrawals without a penalty?

Yes. Fixed annuities offer a percentage (typically up to 10%) that an owner can withdraw without any penalties.

What is the annual interest rate strategy compared to a MYGA.

In a traditional fixed annuity, the interest rate is guaranteed for a shorter term, typically one year – thus an “annual interest rate strategy.” However, in an MYGA, the interest rate is guaranteed for multiple years, aligning with the “multi-year interest rate strategy.”

What is the maximum payout age for fixed annuities?

The maximum payout age for fixed annuities varies by contract and insurance company, but it is often set around age 95 to 100.

What is the fixed annuity definition?

A fixed annuity is a financial product that provides a guaranteed stream of income over a specified period. It is a contract between an individual and an insurance company, where the individual agrees to make a lump-sum payment or series of payments, and the insurance company guarantees a fixed interest rate over the term. This provides individuals with a stable income source during their retirement years.

What are the disadvantages of a fixed annuity?

Some criticisms of fixed annuities include limited liquidity, withdrawal restrictions during the surrender period, high fees, and potential impact on buying power after the initial guarantee period.

How do I evaluate the financial strength of annuity issuers?

Evaluating the financial strength of annuity issuers is crucial to ensure the stability and reliability of the annuity contract. Companies such as North American, Lincoln Financial Group, Midland National Life Insurance Company, Nationwide, and Great American have been rated A+ by A.M. Best. This rating is a testament to their strong financial stability and their ability to meet their ongoing insurance obligations. Using A.M. Best as a source for financial strength ratings provides an authoritative and reliable assessment of an insurer’s financial health, underscoring the importance of choosing issuers with high ratings for your annuity investments.

Who bears the risk in a fixed annuity?

The insurance company bears the investment risk. The insurer guarantees the annuitant a fixed rate of return and regular payments, thereby assuming the responsibility for managing the underlying investments to ensure they can meet these obligations. This setup protects the annuitant from the volatility of the financial markets.

Related Reading

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

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

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