Fixed Annuities: Is My Fixed Annuity Really Fixed?

Annuities that are fixed have a stated rate of return. Now, does that mean the rate is fixed and never changes for the duration of the contract? Well, that depends. There are some things that you really need to watch out for and we will attempt to cover those here.

Some fixed annuities have a stated rate for the life of the contract. These are often referred to as multi-year guarantees. That means that the rate is pre-determined for the life of the annuity contract. There will be no surprises (for the most part concerning the rate) and the return should not change (unless the company has a contractual right to do so. These can be a good deal for consumers in a falling interest rate environment.

However, some fixed annuities are only fixed for the first year. Following that, the rate adjusts and there is a minimum guarantee that the rate will not fall below. These may be better than multi-year guarantees in a rising interest rate environment but I would tell you that if rates skyrocketed higher, your annuity wouldn't necessarily pay you way better for the subsequent years. Rates are determined by many factors including the profitability of the company and their willingness to sacrifice those profits to keep a happy consumer. However, they didn't become big insurance companies by giving away free money.

What I mean is that you are contractually obligated to stay in that annuity unless you are willing to pay the surrender charges. Some insurance companies won't raise rates even in a rising interest rate environment because they know you are stuck. In this case, it's good to look at renewal histories of the insurance company you are considering investing with.

Whatever the case, fixed annuities aren't always fixed. You must know the terms of your annuity BEFORE you sign the dotted line. The term fixed can be deceiving some times because clients often think that the rate they receive the first year is going to be the rate that is ongoing. This is not always the case, particularly with bonus annuities (ones that give you a bonus in the first year). In particular, I would pay attention to what the minimum guarantee is. This is the rate that the company can never give you less than. This is an important thing to know.

However, this is only one of the deceiving things about fixed annuities.