In this post I wanted to discuss the plain vanilla Fixed Annuity option.
A Fixed Annuity is offered by an insurance company and provides the owner a stated rate of interest each year during the contract. The closest equivalent investment would be a CD. Whereas CDs at a bank generally are offered for shorter time periods, Fixed Annuities provide slightly higher rates of interest by committing to longer investment horizons (2 – 10 years).
Similar to CDs, surrendering the Fixed Annuity before the holding period has ended will cause the owner penalties or surrender charges which could cause a portion of the principal/interest to be forfeited. In these instances, the owner of the Fixed Annuity is left with less than the original investment. Therefore it is extremely important to understand that a Fixed Annuity is a long-term commitment. Fixed Annuity companies may offer a limited amount of liquidity to the account owner such as the ability to withdraw 10% of the account value each year with no penalties.
In addition to the term Fixed Annuity, this type of investments sometimes go by the term Multi-Year Guaranteed Annuity or MYGAs.
When held to full maturity, these investments guarantee both the principal and interest. As stated before, they provide slightly higher interest rates than shorter-term CDs in exchange for longer holding periods.
In low interest rate environments, such as we are today, it makes sense to limit the duration of Fixed Annuities to shorter time periods so that once the guarantee period is over, they can be renewed at potentially higher rates (as interest rates rise).
If you have any questions, feel free to contact me.