Fixed annuities are simplified products, offering a tax-deferred guaranteed fixed rate of return for a specified period.
In 2021, fixed-rate deferred annuity sales totaled $53.4B, a 2% increase from 2020. Offering significantly higher returns than CDs, MYGAs have become attractive than traditional short-duration fixed rate products. Accordingly, 2021's sales of fixed-rate deferred annuities were at their highest level since the Great Recession.
These measures are created within the context of insurance products.
How Fixed Annuities Work
Similar to certificates of deposit (CDs) or money market funds, fixed annuities offer complete downside protection against market fluctuations by guaranteeing a minimum rate of return for a specified period. However, unlike CDs or money market funds, interest rates are often higher and assets grow tax deferred, allowing the possibility of greater accumulation over the life of the annuity.
Most fixed annuities have surrender periods to ensure the duration required to deliver the product benefits. This is similar to other types of investments that require a duration and may come with an early withdrawal or liquidity penalty.
Problems with Commissioned Fixed Annuities
How to Think About Commission-Free Fixed Annuities
When your client needs:
PRINCIPAL PROTECTION: Fixed annuities are typically used for clients nearing or in retirement, as they protect principal from market downturns, yet provide a minimum guaranteed rate of return.
FIXED INCOME: Fixed annuities provide a consistent stream of income for clients that are looking to de-risk their portfolios from equities.
CASH REPLACEMENT: Fixed annuities can be used instead of cash investments, such as CDs or money market funds, to help generate better returns subject to the terms of the contract.3
2Averages taken from DPL’s offering of fixed annuity 4-year rates vs. Annuity Rate Watch Average 4-year rates as of October 2018.
3Surrender charges, market value adjustments and other contract charges may apply that can reduce the principal.
Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.
There are risks, fees and charges associated with fixed annuities.
The purchase of an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefits. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to recommending the purchase of an annuity within a tax-qualified retirement plan. In addition to surrender charges, withdrawals are subject to income tax.
Withdrawals prior to age 59 1/2 may also be subject to a 10% federal tax penalty.
Have more questions about our Fixed Annuity options?
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