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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.

Tax-Deferred Growth

One of the many features of a fixed rate annuity is that interest earnings can grow tax-deferred, meaning that no current tax liability is due on interest earnings until withdrawn. In contrast, holders of bank CD's, Treasury Bills and even mutual funds may have to pay income tax on interest or dividends as earned, regardless of whether it is withdrawn or not. This gives a fixed rate annuity a distinct advantage if the annuitant wants the certainty of a guaranteed, fixed rate of return, but doesn't need current income.


Like most annuities, fixed rate annuities have early withdrawal penalties known as "surrender charges," however, these types of policies offer the annuitant a variety of liquidity options when it comes to making withdrawals. For example, should the annuitant need to make a one-time withdrawal or want to use their fixed rate annuity to provide monthly income, he or she can typically withdrawal the greater of their interest earned or 10% of the surrender value each year, without penalty.

Fixed rate annuities also offer a variety of other income options similar to those offered by immediate annuities. Some may also offer income riders, such as a "Lifetime Income Benefit Rider." While fees are often associated with this particular income option, they are usually justified by higher income payouts and better liquidity options than ordinary immediate annuities. To read more about lifetime income benefit riders, click here.

Two other liquidity options you might find associated with a fixed rate annuity are a nursing home waiver and/or the terminal illness rider (waiver). The nursing home waiver allows the annuitant to surrender the contract in full, without penalty, if the annuitant is confined to a nursing home for 90 days or longer. Similarly, the terminal illness rider will waive any type of penalty on surrender, in the event the annuitant is diagnosed with a terminal illness. If included, neither of these features usually have any type of fee associated with them.


Most fixed rate annuities do not charge fees or expenses except for income riders, which are optional.

Estate Planning

All annuities allow you to name a beneficiary in the event of the annuitant's death. If properly designated, the proceeds of the annuity bypass probate and go directly to the named beneficiary.

Possible Advantages

Fixed rate annuities generally have no internal fees and typically pay a higher, guaranteed, rate of interest than a bank CD or Treasury Bill. These earnings grow tax-deferred until withdrawn. With a fixed rate annuity strategy, you will also have the assurance that the current interest rate being credited to the annuity can never be less than the guaranteed rate, regardless of prevailing interest rates or market conditions.

Possible Disadvantages

Similar to bank CD's and Treasury Bills, fixed rate annuities have early withdrawal penalties should you decide you want all of your money back before the end of the contract term, which typically ranges from 5 to 10 years. However, most fixed rate annuities offer a variety of income withdrawal options, which, if elected, will avoid any early withdrawal penalties. Also, the current interest rate of many fixed rate annuities is higher in the first year than in subsequent years, but again, the current rate can never be less than the guaranteed rate.


A fixed rate annuity can be an excellent alternative to bank CD's, Treasury Bills and even mutual funds if the purchaser is looking for both the safety and the certainty of a guaranteed, fixed rate of interest. They also offer tax-deferred interest and a myriad of income options, including income riders designed to provide the annuitant with a guaranteed, lifetime of income without sacrificing liquidity.

As with any annuity, it is important to know what you are purchasing, how it works and the terms of the annuity contract. To find out more about fixed rate annuities, contact us today or speak with your Alliance America Agent Advisor for more information.