Fixed Annuity

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Definition

A fixed annuity is defined as the type of insurance contract that pays the buyer guaranteed returns on their contribution to the annuity account.

Description

A fixed annuity can be purchased by making a lump sum payment or by making the payments periodically. The insurance company in return confirms that the annuity account will earn benefits at standard rate of interest. The period when annuity earns interest is called accumulation phase.

When the annuitant (the annuity owner) chooses to receive the regular income from the annuity, the insurance company calculates the payment based on the age and the money in the account. The start of the payment is called the payout phase.

A fixed annuity holder knows the fixed amount of returns they will receive after the end of the accumulation phase. The insurance company can adjust the rate of return after the initial guaranteed period in the contract expires.

Depending on the need, a fixed annuity can also be converted into an immediate annuity at any time the owner selects. Fixed annuities can be further segregated into three broad types that include traditional, index and multi-year guaranteed.

Traditional Fixed Annuity: The traditional fixed annuity is based on the contract rate for a set period. Rates can change after some time. The annuity is good for those who want to save for retirement.

Fixed Index Annuity:This type of annuity is best for those who look for stable returns.

Multi-Year Guaranteed Fixed Annuity: The investors who look for a safe and stable long-term income stream can invest in this type of annuity.

Example

Ravi purchased a guaranteed annuity plan with a single premium of Rs.10 lakhs. The insurance policy will pay an annuity of Rs.77,344/-. The fixed annuity payout frequency was annual.

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