Fixed Annuity
A fixed annuity is an insurance contract that credits interest at a guaranteed minimum rate during the accumulation phase and provides predictable, level income payments during the distribution phase.
Fixed annuities offer contractual certainty that distinguishes them from market-linked investments. During the accumulation phase, the insurer guarantees that the account value will earn at least a minimum interest rate specified in the contract, regardless of how the insurer's general account investments perform. Many contracts also offer a higher declared rate for an initial period — sometimes one to five years — after which the rate resets based on the insurer's current crediting strategy.
One popular variant is the multi-year guaranteed annuity (MYGA), which locks in a fixed interest rate for a stated term (commonly two to ten years) similar in concept to a bank certificate of deposit. Unlike a CD, however, the interest compounds on a tax-deferred basis, meaning no income tax is owed until funds are withdrawn. This deferral benefit can be meaningful for investors in higher tax brackets who do not need current income from their savings.
When the owner annuitizes a fixed annuity, the insurer converts the accumulated value into a series of level payments. The payment amount depends on the annuity option selected. A straight life annuity provides the highest monthly payment but stops at the annuitant's death, with no survivor benefit. A joint and survivor annuity continues at a reduced rate after the first annuitant dies for the lifetime of the surviving annuitant. Period-certain options guarantee payments for a minimum number of years even if the annuitant dies early.
Fixed annuities are regulated at the state level by state insurance commissioners rather than by the SEC or FINRA, because they do not involve securities. The creditworthiness of the issuing insurance company is therefore the primary risk for the contract holder. State insurance guaranty associations provide a backstop if an insurer becomes insolvent, but coverage limits vary by state — typically $250,000 per person per insurer — and are not equivalent to FDIC insurance. Rating agencies such as AM Best, Moody's, and Standard and Poor's publish financial strength ratings that investors use to assess insurer stability before purchasing a contract.