Fixed Annuity - The Water Fall of Fixed Payment

An annuity, in simple words, is an annual payment. Annuity is also a company’s (usually an insurance company) product that allows you to accumulate tax-deferred assets, which are converted to a source of lifetime annual income… so simple, isn’t it?

In other words, we can say an annuity is a periodic payment made regularly by a company to someone. The company can be an insurance company and this someone here can be a policyholder, a bondholder, an employee or a retiree. The duration can be fixed or contingent such as lifetime of the recipient.

Annuity generally refers to an account-usually a retirement account, to which the person contributes during his working life. As the investment market dictates, this cash is in turn invested and the annuitant starts receiving the principal and the earnings after retirement. Many types of annuities exist in market, as one can opt for fixed or variable contribution as well as fixed or variable payments can be received. One can choose to go for onetime payment or monthly payments over fixed time duration.

Now coming to the fixed annuity- as the name suggests, it provides the annuitant a fixed return for the life of annuity. It is a contract that allows you to accumulate earnings at a fixed rate during a build-up period. The rate is fixed here and this is sometimes called as ‘guaranteed-dollar annuity’ as the income to be received is fixed. However, it is not the case in variable annuity. In variable annuity the return is divided into two parts, one part is small and fixed and the other part depends on the performance of the chosen portfolio.

The main difference between fixed annuity and variable annuity is the investment vehicles in which the money is invested by the companies. For fixed annuities, the amount is invested in low-risk vehicles like bonds and for the variable ones money is invested in high risk vehicles like mutual funds and stocks where the risk is high but the chances of bigger returns are more. The fixed one gives you an assurance of the safer returns.