There are many types of fixed annuities. A fixed annuity can mean Single Premium Immediate Annuity (SPIA), Deferred Income Annuity (DIA), Qualified Longevity Annuity Contract (QLAC), Multi-Year Guarantee Annuity (MYGA), and Fixed Indexed Annuity (FIA). Those are the five primary types of fixed annuities.
So how does a fixed annuity work? It depends on the type. SPIAs, DIAs, and QLACs are income products. They're going to pay a lifetime income stream for as long as you live. The primary pricing mechanism is your life expectancy at the time you take the payments. Annuities are the only product on the planet that will pay regardless of how long you live.
The other type of fixed annuities, Multi-Year Guarantee Annuities are the annuity industry's version of a CD. It will pay a specific interest rate for a set period. You can lock in an interest rate in ranges of 2 – 10 years, just like a CD. The difference between a MYGA and a CD is that non-IRA funds grow tax-deferred in a MYGA. In a CD the interest is taxed annually, even if you don’t take it out.
The last type of fixed annuity is a Fixed Indexed Annuity, which was created in 1995 to compete with CD returns. Interest is credited based on a specific index such as the S&P 500. These are not market products. Unfortunately, they're sold as market products, but they are not. They're fixed annuities. They are not securities. They're not bad products. They're just principle protection CD products, period, end of story.
It depends on what you're looking for the annuity to do. Fixed annuities are guaranteed products. You should purchase them for lifetime income or principal protection.
SPIA should be used for income that starts from 30 days after the policy issue date up to one year. DIAs should be used if you want guaranteed income to start after 13 months or as far out as 40 years. QLACs are DIAs that are used inside your traditional IRA for future income and reduce RMDs. You can put your spouse on as a lifetime income stream guarantee person as well and they can get paid for the rest of their life.
The other types are principle protection fixed annuities. That would be MYGAs, which offer a fixed rate, just like a CD and FIAs, which historically average CD type returns. Both protect the principal. Both have no annual fees unless you attach a rider. You're just going to protect the principle and get a CD type return.
I know that FIAs are pitched as market type products. They are not. If you own one, you understand that they are not. If you're getting ready to buy one for market growth, please don't because were developed in 1995 to compete with CD returns and that's exactly what they do. So are fixed annuities a good investment? It depends on how you want to place the money, what type of transfer risk you're looking at, and what type of contractual guarantees you're looking to solve.
It depends on what type of fixed annuity you're talking about. SPIAs, DIAs, and QLACs are lifetime income products. Those are transfer-of-risk, pension-type products. The rates on those lifetime income stream products are primarily based on your life expectancy at the time you take the payment. Interest rates play a secondary role.
When you talk about rates for lifetime income, you're talking about a life expectancy rate primarily in combination with interest because the income stream is a combination of return of principal plus interest based on your life expectancy.
If you work with The Annuity Man we will make sure to get you the best rate possible. Now, what is a good rate for principal protection? Once again, annuities are commodity products. They should be shopped with all carries for the highest contractual guarantee. On theannuityman.com we have a live feed of the best fixed rates available. Tell us your state and how long you want to lock in a rate and we will show you the best rates available in your state.
Keep in mind rates change. With all annuity products, think of it like a gallon of milk. Every seven to 10 days, rates can change.
Now, a good rate for a FIA, that's a little bit different because the return is based on a call option and currently there are over 700 different call options for FIAs. If you want to dig in, I've written a book on FIAs I'll send it to you. Once you read it, you and I can have a conversation so I can walk you through how FIAs work. Not the pitch, not the sizzle, I'm talking about the steak, how they work and what you should be looking at from the standpoint of how to make a good decision if you want to purchase a Fixed Indexed Annuity.
SPIAs, DIAs, and QLACs can be structured so that the annuity company is on the hook to pay for the rest of your life. But when you die, any unused money in that account can go to the listed beneficiaries of the policy and the evil annuity company doesn't keep a penny.
On the principal protection products, you will not lose any money as long as you keep the annuity until the end of the term. If you purchase a 3-year MYGA, that guarantees you a specific rate for 3 years, and you keep it in place the whole 3 years, you are guaranteed to get your principal and the guaranteed interest. There are no moving parts, there are no annual fees. You're just going to get a contractually guaranteed annual interest rate for the specific period that you choose. Same thing for FIAs, as long as you keep the annuity in place until the end of the term you chose. Principal protected, 100%. you're not going to lose money.