Fixed, Variable, and Indexed Annuities

Annuity Fundamentals and Fixed Annuities

An annuity is an insurance contract that can provide tax-deferred accumulation, an income stream, or both, depending on its terms. During the accumulation period of a deferred annuity, premiums may be paid and earnings generally grow tax-deferred until withdrawn. When the owner decides to convert accumulated funds into an income stream, the contract enters the annuitization period, which is also known as the payout or liquidation period.

A fixed deferred annuity guarantees a minimum interest rate on its accumulation value; a fixed immediate annuity instead guarantees payments under its payout terms. The insurer supports fixed annuity guarantees with assets held in its general account. Depending on the terms of the contract, the insurer may also declare a current rate or guarantee a specific rate for a stated period. Because the insurance company guarantees the interest rate, the insurer bears the investment risk of meeting its commitments. However, the contract owner still faces risks such as inflation, which can reduce the purchasing power of fixed payments, as well as the insurer's inability to pay, contract charges, and limits on access to funds.

If a fixed annuity is annuitized using a fixed payout option, it provides guaranteed payments at the frequency selected under the contract. This design can suit a consumer seeking stated interest guarantees and a guaranteed income option, subject to the insurer's ability to pay and the contract's charges and withdrawal limits. State annuity nonforfeiture laws set minimum surrender value requirements for covered deferred annuities, and this minimum value may be less than the total premiums paid into the contract.