Fixed Annuities

Lesson

Fixed annuities are insurance products that provide a guaranteed income stream to the annuitant, typically for retirement purposes. They are considered low-risk investment vehicles, as the insurance company guarantees a fixed interest rate on the invested principal. Fixed annuities can be immediate or deferred, with the income payments starting immediately or later.

Practice Question #1

Which of the following best describes a fixed annuity?

A) An insurance product that provides a death benefit to beneficiaries

B) An investment vehicle that guarantees a fixed income stream for retirement

C) A type of bond that pays a fixed interest rate

D) A mutual fund that invests in a diversified portfolio of stocks and bonds

Select an option above to see an explanation here.

A) This describes life insurance, not a fixed annuity. B) A fixed annuity is an insurance product that guarantees a fixed income stream for retirement. C) This describes a bond, not a fixed annuity. D) This describes a mutual fund, not a fixed annuity.

Terms

Fixed Annuity:: An insurance product that guarantees a fixed income stream to the annuitant, typically for retirement purposes.
Guaranteed Interest Rate:: The fixed rate of return on the invested principal in a fixed annuity.
Principal:: The initial amount of money invested in an annuity.
Immediate Annuity:: A fixed annuity that begins income payments immediately after the initial investment.
Deferred Annuity:: A fixed annuity that begins income payments at a later date, typically after a specified accumulation period.
Accumulation Period:: The time between the initial investment and the start of income payments in a deferred annuity.
Annuitant:: The individual who receives the income payments from an annuity.
Payout Period:: When the annuitant receives income payments from an annuity.
Surrender Charge:: A fee charged by the insurance company if the annuitant withdraws funds from the annuity before the end of the surrender period.
Surrender Period:: The period during which the annuitant may be subject to surrender charges for withdrawing funds from an annuity.

Practice Question #2

What is the primary difference between an immediate and deferred fixed annuity?

A) The guaranteed interest rate

B) The payout period

C) The start of income payments

D) The surrender period

Select an option above to see an explanation here.

A) Both immediate and deferred fixed annuities have guaranteed interest rates. B) Both types of annuities have payout periods, but this is not the primary difference. C) The primary difference is the start of income payments, with immediate annuities beginning payments immediately and deferred annuities starting later. D) Both types of annuities may have surrender periods, but this is not the primary difference.

Do Not Confuse With

Variable Annuity:: An insurance product that provides an income stream based on the performance of underlying investments rather than a guaranteed interest rate.
Indexed Annuity:: An insurance product that provides an income stream based on the performance of a market index, with a guaranteed minimum return.

Practice Question #3

Which of the following fees may be charged if an annuitant withdraws funds from a fixed annuity before the end of the surrender period?

A) Management fee

B) Sales charge

C) Surrender charge

D) Early withdrawal penalty

Select an option above to see an explanation here.

A) Management fees are typically associated with mutual funds, not fixed annuities. B) Sales charges are typically associated with mutual funds and some insurance products but not specifically for early withdrawals from fixed annuities. C) Surrender charges are fees the insurance company charges if the annuitant withdraws funds from the annuity before the end of the surrender period. D) Early withdrawal penalties are typically associated with retirement accounts like IRAs and 401(k)s, not fixed annuities.

Historical Example

In the early 2000s, fixed annuities gained popularity among retirees due to their guaranteed interest rates and predictable income streams. This was especially appealing during economic uncertainty and low-interest rates on other fixed-income investments, such as bonds and CDs.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A 65-year-old individual invests $100,000 in an immediate fixed annuity with a guaranteed interest rate of 3%. They will receive a fixed income payment of $3,000 per year for the rest of their life, providing a predictable and stable source of retirement income.