How Safe Are Fixed Annuities?

A fixed annuity is a kind of financial instrument that is constructed to act as a source of income. Most usually, this kind of financial instrument is set up by people preparing for retirement.

Annuities in general refer to financial investments that are paid into and can later be accessed via interest payments by the individual who set up the annuity. This person is referred to as the annuitant. An example would be a steel worker that paid into a pension fund during the course or his or her career. At retirement age, the former steel worker would begin receiving regular payments from this investment.

The two most common forms of annuities are fixed annuities and variable annuities. A fixed annuity is an annuity that pays a single fixed rate. For example, the fixed rate may be ten percent of the annuity’s balance a year. During the entire term of the annuity, the annuitant will receive payments for ten percent of the balance. This will never change as long as the fixed annuity is in effect for the entire period of the contract. These stipulations are agreed upon when the annuity contract is purchased.

On the other hand, there are variable annuities. Variable annuities are actually usually composed of two distinct parts. Much like fixed annuities, part of the annuity will pay out at a certain fixed, regardless of market fluctuations. However, on top of this fixed rate will be a much more variable component made up of security investments. The value of these securities can increase and decrease, depending on how the markets they are invested into are performing. Payments made to the annuitant can then be bigger or smaller depending on economic conditions.

You may be left wondering how safe a fixed annuity actually is. The answer is that fixed annuities are extremely safe investments. As previously mentioned, the fixed annuity must pay out the same amount every year no matter what. This is part of the contract the annuitant will sign with an insurance company. It can’t be broken by the insurance company.

Many people take advantage of fixed annuities for this reason. The fixed annuity is set up as a way to give a person or couple a certain level of income regardless of what circumstance may arise. Having the peace of mind that the payment will always be made and will always be the same is certainly something many investors find very desirable. This is especially the case regarding investments made that will pay off during retirement.

Alternatively, other investments such as variable annuities are not as safe. Investments like variable annuities that depend on market fluctuations entail a high amount of risk. If the economy does well and boosts the securities that are part of the variable annuity, the annuitants will be making a lot of money. However, if the economy and the securities in the variable annuity perform poorly, the annuitants will not receive as much as they had hoped for.

However, a fixed annuity is not without any risk. For example, the health of a fixed annuity long term is tied to the financial institution that set up the annuity. If the insurance company faces extreme financial problems and is forced to go out of business, this may put the annuity in jeopardy.

Insurance companies don’t often go out of business however. More times than not, weak performing insurance companies are merged with other insurance companies. essentially honoring the contracts the previous company made with customers.

One more risk is the fact that interest rates may rise after the contract was signed. If the plan lasts for ten years, it’s rather certain that the interest rate will fluctuate during that period. However, this is certainly a much smaller risk than tying the health of the annuity to security indexes like variable annuities do.

Over all, while a fixed annuity is not completely immune to risk in every conceivable scenario, it is still one of the safest investment plans available.