Fixed annuity frequently asked questions.
What is the difference between fixed and CD-Type or Multi-Year Guarantee (MYG) annuities?
What is bonus fixed annuity and what are its caveats?
What is the difference between immediate and deferred annuity?
What are the differences between CD-type and indexed annuities?
What is the tax treatment of fixed annuities?
What do I need to know about surrender charges?
How safe is my investment in a fixed annuity?
Q.: What is an annuity?
A.: An annuity is a legal contract between an insurance company and an annuity owner.
Q: What is the difference between fixed and CD-Type or Multi-Year
Guarantee (MYG) annuities?
A: CD-type or MYG annuity is a type of fixed annuity that offers a rate guarantee for the entire term
of the contract. By contrast, some other fixed annuities offer a rate guarantee for a portion of the
contract term and allow the credited rate of interest for the remainder of the term to drop to the
contract minimum, which can be as low as 1%
Q: What is bonus fixed annuity and what are its caveats?
A: A bonus fixed annuity offers unusually high rate compared to the prevailing interest rates for the
first year and allows the insurer to determine the rate paid after that for the remainder of the contract term.
This creates a risk that the insurer needs to recoup the high rate paid in the first year and may assign
an unusually low rate for the remainder of the contract term. The annuity owner in this case has very little
recourse since the surrender charges apply should he/she decide to withdraw the funds after the first year.
Q: What is the difference between an immediate and a deferred annuity?
A: An immediate annuity turns a lump sum into a stream of income for the life of the annuity owner or another person(s).
A deferred annuity is an accumulation vehicle that grows over time and accrues interest and is usually funded
by a lump sum.
Q: What are the differences between CD-type and indexed annuities?
A: Both are considered fixed annuities because the value will not go down as long as the contract
is held until the end of the term and there were no withdrawals from the contract. Fixed CD-type
annuities credit a specified rate of interest that cannot go up or down for the duration of the
specified period once the contract is issued. Fixed indexed annuities allow the annuity owner to
receive an interest rate derived from the performance of a certain basket of securities, often
an S&P 500 index, and may credit a specified percentage of the increase in the index to the
annuity contract in up periods, up to the cap. In down periods, the value of the contract does
not go down as the contract owner does not participate in the downward movement of the underlying
index. Fixed indexed annuities are great for risk-averse investors who want their investment to
keep up with inflation without the stomach-wrenching ups and downs of the market.
Q: What is the tax treatment of fixed annuities?
A: Your investment grows tax-deferred inside the fixed annuity, which means you do not need
to pay taxes on the interest credited until you take the money out of an annuity. When you do take
the money out, the earnings will be taxed as ordinary income and if you are younger than 59 1/2
at the time of withdrawal, you will owe the IRS a 10% penalty. This means that to avoid the penalty
at the end of the contract term you will have to put the proceeds into another annuity. At that
time you can shop for the best rate, choose another insurance company and transfer the funds to
the new company without triggering a 10% penalty. This is called a 1035 exchange.
Q: What do I need to know about surrender charges?
A: If you decide to withdraw funds from the contract prior to the end of the contract term,
surrender charges may apply. Usually, the longer the contract term, the higher the percentage
of surrender charges. The longer you hold the contract, the smaller the percentage of the surrender
charges becomes. Surrender charges are used to reimburse the insurance company for the expenses
associated with issuing the contract, particularly the commission paid to the insurance agent.
It is important to know the surrender charge schedule and make sure that you are comfortable
with holding the annuity until the end of the contract term to avoid paying high surrender charges.
Q: How safe is my investment in a fixed annuity?
A: The repayment of principal and interest is guaranteed by the claims-paying ability of the
insurance company that issues the annuity contract. CD-type annuities are NOT FDIC-insured.
That is why it is important to pay attention to the rating of the insurance company provided
usually by A.M. Best and S&P. Our site only displays rates by insurers who are rated A- or
better by A.M. Best. Usually, the lower the rating of the insurer, the higher the rate they will
pay to compensate investors for the higher risk of default.
* The above information is intended for use by Michigan or Illinois residents only. If you are a resident of a state other than Michigan or Illinois, please exit this website and contact an insurance professional licensed to conduct insurance business in your state.
Fixed annuities may not be for everyone. There are fees and expenses associated with fixed annuities that may not be apparent with other fixed income investments. You should make sure you fully understand the annuity before purchasing the product. Our firm does not provide legal or tax advice. Be sure to consult with your own legal and tax advisors before taking any action that may have tax implications.