When setting aside money for retirement or weighing your investment options, you may feel overwhelmed by all the choices available to you. Fixed annuities are just one option that can help guarantee an income after retirement. But like many others, you may be wondering, "Is a fixed annuity a good investment?"
Fortunately, a local independent insurance agent can help you answer that question and shop and compare fixed annuity quotes to find a great rate. Your agent can help you buy a fixed annuity if you determine it's the right fit for your unique goals. But first, you can use our guide to fixed annuity plans to decide for yourself.
What Is a Fixed Annuity?
Annuities are policies issued by insurance companies. They pay a regular guaranteed income for life or a period of years. You buy an annuity policy by making a single payment or a series of payments.
Fixed annuity definition
A fixed annuity is a type of insurance contract in which the buyer receives a guaranteed interest rate based on the contributions they make to the account.
Fixed annuity vs. variable annuity
A variable annuity is another type of insurance contract in which the interest fluctuates based on the market performance of an investment portfolio that the account's owner chose.
Fixed Deferred Annuities
Fixed deferred annuities accumulate money at a stated rate of interest. The "annuity rate” refers to a fixed deferred annuity rate of interest. The rate is guaranteed for one, three, five, seven, or 10 years.
Fixed annuity interest rates are generally higher than CDs or savings accounts. The rate of return you get is based on the insurance company’s portfolio of U.S. government and highly rated corporate bonds.
The insurance company absorbs any market risk. The benefit is that you get the returns of a large, diversified, and professionally managed bond portfolio with no market risk.
Fixed deferred annuity rates change regularly. Annuity rates are one way to compare fixed deferred annuities offered by different insurance companies.
Fixed Immediate Annuities
Fixed immediate annuities start to pay income 30 days to one year after the purchase payment is made. The annuity rate is applied to the purchase payment to calculate the guaranteed income.
Immediate annuity rates are based on age, sex, and interest rates. Some insurance companies offer more competitive fixed annuity interest rates than others.
How Does a Fixed Annuity Work?
The values of a fixed annuity are guaranteed by the insurance company that underwrites the contract. Here is some key terminology to know when understanding how a fixed annuity works:
- Cash value: This refers to payments made and accumulated at the interest rates applied.
- Surrender value: This refers to the cash value minus any fixed annuity surrender charges for cashing in the policy.
- Annuity payout factors: This is the rate applied to calculate annuity income.
- Minimum interest rate: This is applied to the cash value.
Fixed annuities often have current interest rates and annuity payout factors higher than the guarantees. The current rates change regularly.
Fixed Annuity Benefits
There are many benefits that can come with fixed annuities. The following are reasons many people choose fixed annuities over another option.
- Competitive risk-free returns: Fixed annuity interest rates are generally higher than CDs or savings accounts. Your purchase payments are invested in the insurance company's general account, where the company absorbs any market risk. Rates can never be below the guaranteed rate in the policy.
- Partial withdrawals: You can withdraw up to 10% of the cash value free of any surrender penalties. Penalties and taxes still apply.
- Guaranteed lifetime income: You can select from six or more income options. All of them are guaranteed. Fixed annuity retirement income can help guarantee you'll be able to maintain your standard of living once you're no longer working.
- Tax-deferred growth: Unlike CDs or savings accounts, the growth in a tax-deferred fixed annuity is not taxed until you begin to withdraw income or other distributions.
- Long-term care benefits: Some fixed annuities offer long-term care benefits at an additional cost, making them the best fixed annuities for seniors.
- Creditor protection: Most states offer annuities some form of creditor protection. In some cases, these are unlimited protections.
An independent insurance agent can also help you weigh fixed annuity pros and cons to determine if they are the right investment choice.
How Much Does a Fixed Annuity Cost?
Fixed annuity costs vary based on the specific type you choose. The cost of a fixed annuity is determined by several factors:
- Front-end sales loads: This is deducted from your purchase payment. Most products on the market today don’t have a front-end sales load.
- Surrender penalties: Most fixed annuities charge a fee if you cash in your contract or withdraw more than 10% of the cash value. Surrender penalties decline to zero over a period of several years, usually not more than 10.
- Market value adjustments: The insurance company pays a fixed rate of return and absorbs any market risk. If you cash in your contract early, the insurance company loses money if interest rates are rising. The insurance company profits if interest rates are declining. The market value adjustment will be a cost or a bonus depending on interest rates.
- Rider fees: Optional riders like long-term care benefits have a cost. The fee is usually a percentage of the cash value.
To find the best rate on a fixed annuity, you can use an online fixed annuity calculator or work together with an independent insurance agent.
How Do I Get Income from a Fixed Annuity?
The income from a fixed deferred annuity is determined by the account value and the purchase premium. The option you select will also affect the income amount. Once an income option is selected, there is no access to account values. The chart below outlines the income options for fixed annuities.
Guaranteed Fixed Annuity Income Options
| During Lifetime | At Death | Advantages | Disadvantages | |
|---|---|---|---|---|
| Life | Pays income for the annuitant’s life | None | Highest income | No refund of unused principal |
| Life and 10 Years Certain | Pays income for life, not less than 10 years | Balance if death occurs before the end of 10 years | Protection for beneficiaries | Lower income |
| Life and 20 Years Certain | Pays income for life, not less than 20 years | Balance if death occurs before the end of 20 years | Protection for beneficiaries | Lower income |
| Life with Cash Refund | Pays income for life, payments are at least a specified refund amount | Balance of refund amount | Protection for beneficiaries | Lower income |
| Period Certain | Pays income for a specified number of years | Balance of payments | Useful for certain planning purposes | Outliving income |
| Joint & Survivor 100% | Pays income for the longer of the two lives | No further payments on the second death | Surviving spouse continues to receive income for life | Lower income |
| Guaranteed Lifetime Withdrawal Benefit Single Life | Pays income for an annuitant’s life | Balance of account | Access to account values, death benefit | Income taxed as withdrawals |
| Guaranteed Lifetime Withdrawal Joint Life | Pays income for the lifetime of the annuitant and the second life | Balance of account at second death | Access to the account, death benefit | Income taxed as withdrawals |
How Is a Fixed Annuity Taxed?
Tax treatment differs for traditional qualified annuities, Roth-qualified annuities, and non-qualified annuities. The chart below summarizes the tax treatment of fixed annuities.
| Non-Qualified | Qualified | Qualified/Roth | |
|---|---|---|---|
| Contributions | After-tax, unlimited | Pre-tax, limits for IRAs and qualified plans apply | After-tax, limits for IRAs and qualified plans apply |
| Growth | Tax-deferred | Tax-deferred | Tax-deferred |
| Surrender | Gain is taxed at ordinary rates. | All proceeds taxable | Tax-free |
| Annuity Income | Partially taxable at ordinary rates | 100% taxable at ordinary rates | Tax-free |
| Withdrawals | Withdrawals are gain first, gain is taxed at ordinary rates. | 100% taxable at ordinary rates | Tax-free |
| Loans | Loans are considered withdrawals; gain first is taxed at ordinary rates | IRA loans are not permitted; pension plans may have exceptions for home purchase and loans repaid in five years | IRA loans are not permitted; pension plans may have exceptions for home purchase and loans repaid in five years |
| Death Benefits | Gain is taxed at ordinary rates; proceeds will be taxed as "gain first" | Rules for inherited traditional IRAs and qualified plans apply | Rules for inherited Roth IRAs and plans apply |
| Sales | Proceeds in excess of the basis are taxed at ordinary rates | N/A | N/A |
| Penalties | 10% for withdrawals before age 59-1/2 | 10% for withdrawals before age 59-1/2 | 10% for withdrawals before age 59-1/2, penalty for withdrawals prior to the end of the fifth year |
Best Fixed Annuity Rates 2025
Here's where to find the best rates from this year's top fixed annuity companies.
| Annuity Name | Issuer | Interest Rate | Contract Length | Minimum Premium | AM Best Rating |
|---|---|---|---|---|---|
| Gainbridge SteadyPeace | Gainbridge Life Insurance | 5.5-5.8% | 5 years | $1,000 | A- |
| Reliance Guarantee 5 | Reliance Standard Life Insurance | 5% | 5 years | $20,000 | A++ |
| MNL Guarantee Pro 5 | Midland National Life Insurance | 4.6-4.85% | 5 years | $20,000 | A+ |
| MassMutual Premiere Voyage | MassMutual | 4.05-4.45% | 5 years | $10,000 | A++ |
| Protective Secure Saver | Protective Life Insurance | 4.05-5.25% | 5 years | $10,000 | A+ |
| New York Life Secure Term MVA Fixed Annuity II | New York Life Insurance | 3.8-4.45% | 5 years | $5,000 | A++ |
What Should I Look for in a Fixed Annuity?
The first concern for any type of annuity is the insurance company's financial condition. The primary rating services that cover insurance companies are AM Best, Moody’s, S&P Global (formerly known as Standard & Poor's), and Fitch. Each has differences in its methodologies and rating designations.
The rating each service assigns reflects its opinion about the insurance companies’ ability to pay claims. Look for high-quality ratings from at least two of the four rating agencies. Rates on fixed annuities change frequently, so you'll want to make sure you have a rate comparison from several companies.
The surrender period should never be longer than the rate guarantee. For a market value adjustment (MVA) policy, the MVA can have a positive or negative effect if you withdraw money or surrender the policy early. An independent insurance agent can also help you find the right fixed annuity for your personal needs.
Here's How an Independent Insurance Agent Can Help
Fixed annuities can be an important part of your retirement plan. But while they have many features and benefits, fixed annuities are not for everyone. An independent insurance agent can help you decide if a fixed annuity is right for you. They can also shop and compare fixed annuity rates and options from several of the top carriers for you to find the best deal.
Sources
Advisor’s guide to annuities John Olsen
Fundamentals of Investments Wilson & Hopkins
NAIC Buyers guide to deferred annuities
IRS PUB 575
IRS PUB 410
Fitch Ratings Definitions
Moody’s Moody’s rating scale and definition
S&P Global Understanding Ratings
A.M. Best Why An A.M. Best Financial Rating Is Important
The American College of Trust and Estate Counsel State Survey of Asset Protection Techniques
Brighthouse,Gainbridge,Security Benefit,American Life 5 yr rates as of 10 28 2019
Fidelity Highest CD rate
https://www.bankrate.com/investing/best-fixed-annuity-rates/#best-annuity-rates
https://www.investopedia.com/terms/f/fixedannuity.asp
