Fixed annuities provide guaranteed retirement income and are typically favored by individuals who either have already left the work force or who are nearing retirement. The guaranteed retirement income results from the fact that fixed annuities give their owners - who are called annuitants - a set amount of income in a regular series of payments over a defined period of time or until a specified event has occurred. The convenience and predictability of fixed annuities make them popular with retirees who value income certainty.
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Types of Fixed Annuities
There are two major types of fixed annuities. Life annuities pay a set amount on a regular basis until the owner of the annuity dies. Term certain annuities pay a set amount on a regular, usually monthly, basis until the annuity contract expires, which could be before the death of the annuitant.
There are several kinds of life annuities. Some life annuities provide for changes in the structure of future payments if the annuitant becomes ill or dies early.
The greater the number of insurance components included in the annuity, the longer its payments will last. The regular payments are reduced according to the length of time over which they are to last. The monthly payment amount also depends on the life expectancy of the annuitant, with higher payments provided when life expectancy is lower.
The cost of a life annuity includes the money invested in the contract and the premium that is paid for any added insurance components. Costs rise as more components are included.
Types of Life Annuities
The simplest kind of life annuity is the straight life annuity in which the provision of income until the death of the annuitant is the
sole insurance component. This is the least expensive type of life annuity, but it does not provide for payouts to survivors after the annuitant dies.
A substandard-health annuity is designed for individuals with significant health problems. These annuities are priced on the basis of life expectancy. The payouts over the specified period of the annuity are high compared to other annuity products, since the annuitant has a shorter life expectancy.
Life annuities with a guaranteed term allow owners to name a beneficiary to receive whatever money has not been paid out before the annuitant's death. In cases of sudden death, a beneficiary may receive a lump-sum payment from the insurer.
Joint life with last survivor annuities are meant to continue payments to the annuitant's spouse after his or her death. These payments are passed on to the beneficiary regardless of circumstances and provide continued security to the annuitant's spouse.
Term Certain Annuities
Term certain annuities are fixed annuities that pay specified amounts over a defined period of time until a set date is reached, regardless of what happens to the annuitant during the defined period. If the annuitant dies before the date specified, the rest of the annuity's value reverts to the insurance company. Once the specified term is over, the annuity income ends. Term certain annuities are often purchased by individuals who want to receive a stable retirement income, but who either do not want or cannot afford additional insurance components.
Fixed annuities represent good investments, particularly for those who want to create guaranteed retirement income. They are designed for conservative investors who value guaranteed principal payments and steady rates of return.
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