If you choose to invest in a fixed annuity, you will be able to receive a fixed income for a chosen period of time, which is often your own lifetime. There are different fixed annuity options, most of which you can purchase through life insurance companies. To fund a fixed annuity, you will make a lump sum payment, although some companies also allow for ongoing premium payments. The insurance company then uses your money to invest, while at the same time giving you a guaranteed interest amount, which is laid out in the agreement you sign with the company. There are two main fixed annuity options for people to choose from, which are life and period certain. Other options do exist, but they tend to be optional extras added to the two types, for which you have to pay an additional fee.
Understanding the Two Fixed Annuity Options:
1. Fixed Life Annuity
First of all, there is the fixed life annuity, which provides you with a guaranteed income for the rest of your life. The amount of this guaranteed income depends on how much you invest, your age when you started your annuity, what interest rate your life insurance company guarantees you, and what your life expectancy is. You will receive a fixed income, unless you opt to pay extra for the "inflation option rider". In this case, you will receive a cost of living adjustment, which the insurance company will base on inflation each year, calculated to the amount that you receive. You can also choose a survivorship rider, or other specific period options. In this case, when you die, your beneficiaries may continue to receive the income.
2. Period Certain Fixed Annuity
The second option is the period certain fixed annuity, in which case you will receive income until a pre-agreed date, regardless of what happens to you between the start of the annuity and that particular date. One of the reasons why people choose this option is that it comes with a survivorship option as standard. Should you die before the agreed end date of your annuity, then your surviving beneficiaries can choose to either receive the remaining money as a lump sum, or they can choose to receive the monthly payments you were receiving while you were still alive, until the period you had agreed comes to an end. There is a disadvantage to this option, however, which is that there is an end date to the annuity. Should you survive that end date, therefore, you would no longer receive an income.
Overall, the fixed annuity is the more conservative option, with variable annuity being the more modern option. This is because fixed annuities have a fixed return rate within the account you hold. Regardless of which type of annuity you choose, however, you will experience specific advantages and drawbacks. Hence, you should consider how these pros and cons affect you personally, and which ones weigh more heavily in your favor. It is recommended to seek the help of a professional financial advisor in order to come to that decision.