One investment vehicle that is uniquely situated to help individuals accumulate funds for retirement and to distribute them efficiently is the annuity. Because annuities are the only investment product that can generate a stream of income that is guaranteed to last a lifetime, they offer certainty and peace of mind for owners who are concerned about outliving their income. For this reason, annuities have become popular retirement and investment tools.

Annuities also offer their individual contract owners certain income tax advantages, principally tax deferral. As long as the contract’s funds remain within the contract, they are not subject to taxation. These amounts are taxable only when distributed through a withdrawal or loan to a contract owner, or when paid to a beneficiary.

A deferred annuity is designed to accumulate funds for the long-term. Accordingly, it is characterized by an accumulation period. The accumulation period is the period during which funds are deposited into the contract and are credited with interest earnings. Generally speaking, the accumulation period associated with a deferred annuity is typically ten years or more. Contract owners could be assessed a surrender charge if they withdraw funds from their annuities during the contract’s surrender charge period.

Traditional Fixed Annuities

A traditional fixed annuity provides for:

• a fixed level of interest to be credited to the contract determined periodically by the insurer during the accumulation period
• a fixed, unchanging level of income to be paid upon the contract’s annuitization

The rate of interest crediting during the accumulation period is declared by the insurer, subject to periodic change, and is backed by a minimum guaranteed rate of return.

A contract that is annuitized on a fixed basis will pay the same income payment for the entire annuitization period. If, for instance, 60-year-old Bob decided to annuitize his $200,000 annuity contract and selected a fixed monthly lifetime payout option, he would receive payments of about $1,200 every month for the rest of his life. Those payments will not increase or decrease and are guaranteed by the insurer.

Traditional fixed annuity products are conservative investment vehicles, appropriate for those who are risk averse and who seek safety of principal, conservative returns, and minimum guarantees. Most require a holding period of a number of years before the owner can access the contract’s values without incurring a surrender charge. Depending on the insurer and the product, this period may be as short as two or three years or as long as 15 years.

Traditional fixed annuities are also referred to as declared rate annuities.