Annuities are popular investment products in USA. Annuity is a financial contract between an individual and an insurance company, wherein; the individual pays the premium either in a lump sum or in installments to the insurance company. The company in turn agrees to pay an assured source of income.
However, annuity is not a modern day financial product. The existence of annuity dates back to the Roman Empire when the citizens used to make an up-front payment, known as annua. In return, the citizens used to get a regular stream of income.
However, modern day insurance companies offer a variety of annuities like fixed annuity, variable annuity, equity-indexed annuity, life annuity etc. Hence, today’s annuities are better equipped to handle the varying requirements of the investors.
For instance, consider fixed annuity. Fixed annuities are popular amongst risk-averse investors. There are many advantages associated with a fixed annuity. And hence, they are popular amongst cautious investors.
Advantages of a Fixed Annuity:
- Fixed rate of interest: As the name suggests, fixed annuity offer a fixed rate of interest, which might be revised after a while. Most fixed annuities offer interest rates that are higher than the lifetime minimum interest rate guarantee of 3%. Fixed rate of interest ensures that you receive a fixed sum as income. This is beneficial for retirees who would like to have a fixed stream of income.
- Hassle free investment product: Many consider fixed annuity as a hassle free investment product. Unlike stocks or mutual funds, you do not have to manage a portfolio, in case of fixed annuities. This makes fixed annuities an ideal investment vehicle for those who have neither the time nor the inclination to manage their investments.
- Flexibility: Fixed annuity is a flexible investment product. For instance, an investor can choose to receive the payment on a monthly, quarterly or on an annual basis. The investor can also choose to contribute the premium in a single lump sum or in installments. Similarly, one can also seek to receive the income for a lifetime or for a specific period.
- Shield from volatile markets: Fixed annuities shield the investors from the volatilities associated with financial markets such as the stock market. Since the investor receives a fixed rate of interest, volatile markets do not affect the returns.
- Safeguards your capital: Insurance company issuing annuities are regulated by federal as well as state laws. The federal law stipulates that insurance companies must hold a reserve that equals the value of each annuitant’s policy. Similarly, the state law requires the maintenance of surplus capital as well as contributions to state guaranty funds to provide additional security.
- Tax deference: This is one of the biggest advantages associated with a fixed annuity. Tax deference means that no taxes are applicable when interest is being credited to your annuity policy. Thus, you are able to take the benefit of compound growth.
- Lower tax bracket: In case of annuities, the investor is liable to pay the taxes once he starts receiving the payment from the insurance companies. However, most investors opt to receive the payment only after their retirement, by which time they have already entered a lower tax bracket.
Many advantages are associated with a fixed annuity. In fact, fixed annuities are a perfect investment product for the risk-averse investors.
Annuity Basics 
Advantages of A Fixed Annuity
