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Fixed-Rate Annuities

A "fixed rate" annuity is one variation in a broader family of traditional, tax-deferred annuities. Other varieties of tax-deferred annuities include: variable annuities, equity-indexed annuities and multi-year guarantee annuities. While each of these types of annuities share many similarities, the primary difference between each is the method by which interest is both earned and credited.

For example, with a fixed rate annuity, the issuing insurance company assumes all risk by guarantying the annuitant a specified rate of interest. Conversely, with variable annuity, the annuitant assumes all the risk, regardless of investment performance.

Most fixed rate annuities credit one of two different interest rates. The current rate is the interest rate being credited to the annuity at time of issue. The guaranteed rate is the lowest possible rate which can be credited to the annuity by contract. While these two rates are almost always the same in the first policy year, they are often different in subsequent years. Which rate is credited from year to year depends on a variety of factors, including the prevailing interest rate environment. However, the rate can never be less than the guaranteed rate.

Fixed rate annuities are often purchased for their safety, guarantees and tax-deferred growth and are comparable to such products as bank CD's and Treasury Bills.

A "Variable" annuity is a contract between you and an insurance company. Although it shares many similarities with fixed rate and/or equity-indexed annuities, a variable annuity has three major distinctions from these annuities: risk, fees and often how the death benefits are paid. Setting aside these differences, a variable annuity can look, act and feel much like a more traditional fixed or indexed annuity.

The introduction of the "equity-index" has revolutionized the insurance and annuity industry in recent years. Like other tax-deferred annuities, the equity-index annuity is a contract between you and an insurance company; however, it is considered neither a fixed rate nor variable annuity.

A Single Premium Immediate Annuity (SPIA) is a financial instrument purchased from an insurance company with single premium payment. In exchange for this lump-sum payment, the insurance company agrees to pay the buyer a series of fixed-income payments for life, for a specified period of time or both. Income payments from SPIA's generally begin within 30 days from the date the policy is issued, but can start later.

A Multi-Year Guarantee Annuity (MYGA), also known as a "Fixed Rate Annuity," is a variation of traditional tax-deferred annuity. Just like all other forms of annuities, MYGA's are offered by a variety of different insurance companies. While similar to traditional deferred annuities in many ways, the MYGA was designed to compete with other savings instruments such as bank CD's and Treasury Bills.