Advantages of the Fixed Annuity

The fixed annuity is an interesting investment vehicle for the conservative investor.  The behavior of a fixed annuity is most often compared to that of a cd.  While there are definately disadvantages to fixed income annuities, they can provide the average investor a number of benefits.  These advantages are generally more favorable for those that wish to hold the investment long term, are looking for safety from market risk, or have already reached or are nearing retirement age.

Let's take a look at some of the advantages of fixed annuities, in no particular order:

1.  Tax deferred growth.  One definate advantage the fixed income annuity has over cds is tax-deferred growth.  Your investment is allowed to accumulate tax-free until distributions begin.  Unlike some of the other insurance products, the distributions from a fixed annuity are not tax-exempt.

Tax-deferred fixed annuity growth chart

2.  Protection of principal.  Unlike other investment vehicles, the principal of the account is protected from downward loss.  Variable annuities, securities, and other investments can lose value.  The fixed annuity has a fixed interest rate, independent of market downturns.

3. Guaranteed Rate of Return.  The fixed annuity contract establishes a predetermined return on your investment.  This provides a reliable and predictable income, providing safety and peace of mind to the investor.

4. Opportunity to annuitize.  Though one of the more obvious features of an annuity, the opportunity to annuitize shouldn't be overlooked.  Distributions can be spread out over a set period or may continue for the life of the annuitant.

5. Creditor Protected (depends).  In some states and depending on the vehicle, the fixed annuity is probate and creditor protected.  In protected states it can also be protected against frivolous lawsuits.  This again provides another level of security to the investment.

6. Annuity income doesn't count toward calculations for social security benefits.  Income from the annuity is not counted against your allowable income to recieve social security benefits.  This can provide an increased retirement income, and lower tax liability.

7. Lifetime payout provisions possible. Worried about outliving your income?  The fixed annuity can be established to provide a guaranteed income for the life of the annuitant.  This again provides safety and peace of mind.

8. Not vulnerable to market volatility.  Can you say recession buster?  Because of the fixed rate nature of the annuity,  the investor need not worry about account values during periods of recession.

9. Inflation protection* (though doesn't bode well with hyperinflation).  COLA and other inflation adjusting provision (sometimes just in the form of the interest rate) can be written into the annuity contract.

*This is admittedly almost a disadvantage.  Fixed annuities have traditionally not managed to keep up with inflation, though improvements have been made in this regard.

While this list is not comprehensive, it should give you a good look at the advantages of fixed annuities.