Fixed annuity

Introduction
A fixed annuity is an insurance contract that pays a fixed rate of interest for a set period, usually ranging from one to five years. After the set term, a new fixed rate is offered for the next term. A fixed annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into income and payments are received. Earnings within the contract are tax deferred, and are taxed upon withdrawal at income tax rates (similar to qualified retirement plans) and share with these plans the 10% early penalty tax for withdrawals made prior to age 59 and 1/2. If the annuity is held within a retirement plan it is known as a "qualified" annuity and distributions are totally taxable. If the annuity is purchased in the taxable account it is known as a "non-qualified" annuity and only the earnings are subject to tax. There are no minimum distribution requirements if the annuity is non-qualified. Your investment in a fixed annuity is funded by an insurance company's general account and is thus dependent on the claims paying solvency of the insurer. A fixed annuity is not considered an investment security, so it is not regulated by the SEC and there is no prospectus for the contract.

Surrender Fees
A fixed deferred annuity does not have an expense ratio. The expenses of administering and distributing the contract (including sales commissions to agents who sell annuities) are reflected in the interest rate offered to annuity buyers. Almost all fixed annuities have an additional surrender charge on distributions made before the annuity term ends. These charges usually decline gradually over the term of contract, reaching 0% when the contract term matures. Renewing a contract resets the surrender fee over the succeeding term. Most fixed annuities allow a partial free withdrawal privilege, usually 10% of the account balance per year.

Bonus Points
Some fixed deferred annuities, in a marketing ploy, offer enhanced "bonus" interest rates during the first year of an annuity's term. Invariably, the interest rate drops, sometimes considerably, over the remainder of the contract.

The Income Phase
When it comes time for you to take income from your annuity, you have the choice of making periodic or lump sum withdrawals from your annuity or opting to annuitize the contract.

Withdrawals
You can usually draw a partial withdrawal during a fixed annuity's term, and a full withdrawal when the term ends. Withdrawals are on an income first, principal last basis. Withdrawals made prior to age 59 and 1/2 are subject to the 10% federal early withdrawal penalty tax.

Annuitization
Fixed deferred annuities may offer a number of income options (fixed, grades, and inflation adjusted) as well as a wide assortment of annuity payout options. See Immediate Fixed Annuity - SPIA for details on income options.

Distributions Upon the Death of the Variable Annuity Owner
A surviving non-spouse joint owner or beneficiary of a non-qualified fixed annuity must select one of the following distribution options for a fixed annuity inherited during the accumulation phase of the contract:
 * immediate lump sum;
 * according to the five-year rule with complete withdrawal(s) within 5 years of the contract owner's death;
 * annuitization (over the life of the new owner) to start within one year of the contact owner's death.

A spousal co-owner or beneficiary has the option of assuming the variable annuity as his or her own.

Surrender charges are not imposed on a distribution of the annuity to a beneficiary.

The income over basis in a fixed annuity is considered Income in Respect of a Decedent. Should a decedent's estate pay estate tax the portion of the tax attributable to the estate's IRD is deductible as a miscellaneous itemized deduction (not subject to the 2% AGI exclusion) to the beneficiary receiving the IRD. The deduction is figured by computing the Estate due on the entire estate and computing the estate tax due on the estate minus all IRD. The difference between the two provides the deductible amount. The deduction is realized on the IRD as the IRD is paid out to the beneficiary.

The beneficiary's right to income after the death of the annuitant during the annuitization phase of a variable annuity will depend on the annuitization option selected (single life, joint life, or the selection of a guaranteed period). [source:Non-Qualified Annuity Tax Rules].

Credit Ratings and State Guarantee Funds
The return of principal and interest from a fixed annuity is subject to the creditworthiness of the insurer. You should purchase deferred fixed annuities from insurer's gaining the highest credit worthiness ratings from the five insurance rating firms.


 * A.M. Best
 * Fitch Ratings
 * Standard & Poor's
 * Moody's
 * Weiss Ratings

In case of insurer default, your State Guarantee Fund will attempt to find a replacement insurer for your contract, and will offer insurance on a given amount of annuity investment (usually up to $100,000, but greater in some states). The following links provide information on state guarantee limits, as well as what happens as a consequence of an insurance company failure.


 * State Guarantee Funds
 * NOLHGA:What Happens When An Insurance Company Fails

Links
Fixed Annuity Calculator