A fixed annuity is an investment product that pays out a regular income. The amount of the income can be adjusted each year and it is guaranteed for life. There are two types of fixed annuities: immediate and deferred. Immediate annuities begin paying the investor the first day they are purchased, while deferred annuities begin paying the annuitant after a specified period of time. The deferment period can vary from three to twenty years.
There are two basic ways for an individual to invest in a fixed annuity: through their employer or directly through an insurance company. If you are employed by a company, you can purchase a deferred annuity through your employer. This is called an “employer’s annuity”. If you are self-employed, you can buy a deferred annuity through a private insurance company. This is called a “self-directed annuity”.
The major difference between an employer’s annuity and a self-directed annuity is that the former is usually based on the salary of the employee, while the latter is based on the profit of the business. Therefore, if you are buying a deferred annuity through your company, you will probably be making more money than if you were purchasing one outside of your company.
A deferred annuity is designed to pay out a steady stream of income for life. However, the payments may be reduced at any time before the end of the deferment period. For example, if you have a deferred annuity with a ten year deferment period, you may receive a payment of $100 per month for the first five years. After the fifth year, the payments would be reduced to $50 per month until the tenth year, when the payments would stop completely. At that point, the deferred annuity would become a life insurance policy.
There are two main types of deferred annuities: immediate and variable. Immediate annuities are very similar to mutual funds. They are purchased with the investor’s money and then invested in stocks, bonds, and other securities. As with mutual funds, the payments from an immediate annuity are usually tax-deferred. Variable annuities are also similar to mutual funds. However, the payments from a variable annuity are not tax-deferred. Rather, they are taxed as ordinary income.
The major difference between a fixed annuity and a variable annuity is that a fixed annuity guarantees that the payments will be made for life. A variable annuity does not guarantee that the payments will be made. With a fixed annuity, there is no risk of loss. With a variable annuity, there is a risk of loss.
If you are planning on investing in a fixed annuity, you should check with your financial planner to determine which type of annuity is best for your situation.