Understanding fixed annuity

The simple premise of a fixed annuity is that you pay an insurance company a monthly premium. In exchange, the insurance company assures you of a fixed monthly income over a certain number of years.

Within the ambit of fixed annuities are several choices. You can choose, for example, a single premium payment where the payouts to you will begin immediately. If you would like to defer the payouts a bit, you can opt for them to begin at any date. This means that if you would like to hold on till the time of your retirement, you can do so. This is often a retirement plan for many people.

Once annuity payouts begin, they remain steady. Irrespective of recession or inflation, you can expect your payout to happen on time. As an investor, you will have two choices on how you would like to receive your payment. A conservative choice would be to settle on a fixed annuity rate for a specified period of time. You decide on the time frame for which you would like to be paid and your premiums and payouts will be accordingly decided. You have to remember that the payouts made are part principal and part interest. You can also opt for a fixed period with a deferred payout. Taxes will be applicable on the growth.

The next option is for you to choose is to annuitize. This means that you get regular payments till your death. However, after this, you will not be able to pass on the benefit to any next of kin. Irrespective of the amount of you have paid in terms of premium, the amount of the payout will not vary and will remain the same. There will however be some restrictions involved in how much of money you can withdraw and after how long. You should be able to withdraw the interest and to a maximum of 10 per cent each year.

The advantage of fixed annuity is that you can create a monthly income for yourself without worrying about the loss of the principal amount. Do not opt for variable annuity if principal amount is your worry.