There are three kinds of annuities: Fixed, Equity Indexed and Variable. The next three parts of this article will address each one. I will explain how each works, what the pros and cons are, and my overall opinion of the type of annuity and when it might be appropriate.

Fixed Annuities

A fixed annuity is the insurance industry’s answer to CDs. These annuities operate under the same premise: Put your money here and we will guarantee that you will not lose money and that it will grow at a certain (usually low) interest rate. Often these annuities will pay equal, or even a little better than current CD rates. This is the case especially for the introductory period. The company, as an incentive, will offer a rate quite a bit higher than CD rates for the first 1-3 years. After that the rate will change to something based on the current market.

 Benefits
As I mentioned before, there is low risk of losing your principal and you can often get equal or better rates than with a CD. On top of that, while the money is in the annuity you are not taxed on the growth. With a CD you are taxed each year on the interest.Down side –

There is usually a penalty period, often significantly longer than with a CD. Should you need to take your money out you may lose a good sized portion of your principal. With a CD you never lose principal, only a portion of the interest. Also, at some point during the life of the annuity the rate of return might be below that of a CD and you may have penalties and tax implications if you want to move it. Finally, there are often significant fees within the annuity that you do not find in a CD.

When would I recommend a fixed annuity? I am not sure if I would – I haven’t yet. But perhaps it could be appropriate for someone who absolutely cannot afford to lose any principal and does not need much growth, and if the annuity will get better returns than a CD. I would also be very wary of the penalty period and of how hard it is to get the money out, if needed. If all of those things appear satisfactory and it seems like a better fit for the client than other alternatives, then I might move forward with a fixed annuity.

Read Part One

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional. 

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