What Do Fixed Annuities Provide?

Fixed annuities provide contractual guarantees.

That's the simplest way to understand them.

They're insurance contracts designed to transfer specific financial risks from you to an insurance company.

Depending on the type of fixed annuity, those guarantees can address principal protection, lifetime income, legacy planning, or certain long-term care needs.

Key Takeaways

• Fixed annuities are insurance contracts designed around contractual guarantees.
• Different fixed annuity types solve different financial objectives.
• The four primary annuity objectives can be remembered using the PILL framework: Principal Protection, Income for Life, Legacy, and Long-Term Care.
• Annuities have a unique ability to contractually guarantee lifetime income.
• Lifetime income can cover one person or two people jointly.
• Beneficiary protections can be added to many lifetime income structures.

What Types of Fixed Annuities Are Available?

Fixed annuities include several different product categories.

The major types include:

• Multi-Year Guarantee Annuities (MYGAs)
• Fixed Index Annuities (FIAs)
• Single Premium Immediate Annuities (SPIAs)
• Deferred Income Annuities (DIAs)
• Qualified Longevity Annuity Contracts (QLACs)
• Income Riders attached to certain deferred annuities

These products don't all solve the same problem.

The appropriate type depends on the contractual guarantee you need.

The PILL Framework

A simple way to understand what annuities can provide is the PILL framework:

P – Principal Protection

I – Income for Life

L – Legacy

L – Long-Term Care

If you don't need to contractually solve for one or more of those objectives, you may not need an annuity.

Fixed Annuities Can Provide Principal Protection

Principal protection is one of the primary reasons people consider fixed annuities.

For example, a Multi-Year Guarantee Annuity (MYGA) provides a contractually guaranteed interest rate for a specified period.

A Fixed Index Annuity also protects principal from market losses while calculating potential interest based on an external index and the contract's crediting methodology.

The key is that these are fixed insurance products rather than direct stock market investments.

Fixed Annuities Can Provide Lifetime Income

Lifetime income is one of the most important guarantees available from an annuity.

An annuity can contractually provide an income stream that continues for as long as you're alive.

Depending on the contract, lifetime income can come from:

• a SPIA
• a DIA
• a QLAC
• an Income Rider

The appropriate product depends partly on when you want the income to begin.

Annuities Can Create a Personal Pension

If you already receive Social Security, you already have a form of lifetime income.

If you're fortunate enough to have an employer pension, you may have another lifetime income stream.

But many retirees don't have a traditional pension from an employer.

An annuity can be used to establish an additional contractual lifetime income stream.

That can help build an income floor covering part of your required retirement expenses.

How Is Lifetime Annuity Income Calculated?

Lifetime income isn't simply based on current interest rates.

Life expectancy is a major factor.

The older you are when lifetime income begins, the higher the contractual payment will generally be because the insurance company expects to make payments for a shorter period.

With a joint-life annuity, the life expectancies of both people factor into the calculation.

That's one reason joint-life payments are generally lower than comparable single-life payments.

Can an Annuity Cover Your Spouse?

Yes.

Lifetime income can be structured on a joint-life basis.

That means the contractual income can continue for as long as either covered person is alive.

If one spouse dies, the income can continue for the surviving spouse according to the contract.

For married couples who want predictable income to continue regardless of who dies first, that can be an important guarantee.

Does the Annuity Company Keep the Money When You Die?

It doesn't have to be structured that way.

Lifetime annuities can include beneficiary protections.

For example, a contract can be structured so that if both covered people die before receiving the entire contractual amount specified under the payout option, remaining value passes to the beneficiaries.

The exact structure affects the payment amount, so beneficiary protection should be considered when comparing quotes.

Fixed Annuities Can Provide Legacy Benefits

Legacy is another objective within the PILL framework.

Depending on the contract and strategy, annuities can be structured to provide benefits to spouses, children, grandchildren, or other beneficiaries.

That can include leaving remaining contractual value or establishing income designed to continue for another person.

The appropriate structure depends on what you want the money to accomplish after your death.

What About Long-Term Care?

Certain annuity products can also address long-term care-related needs.

These aren't all the same as traditional long-term care insurance.

The specific contract may provide benefits triggered by qualifying care or confinement needs.

Because these provisions vary by product, the contractual details should determine whether a particular annuity actually addresses your long-term care objective.

What Fixed Annuities Don't Primarily Provide

The PILL framework doesn't include a G for growth.

Fixed annuities shouldn't be confused with market investments.

If your primary objective is market growth, market-based investments serve that role.

Fixed annuities are designed to transfer risk and provide contractual guarantees.

That distinction makes it easier to decide which portion of your money, if any, belongs in an annuity.

How Much Should You Put Into a Fixed Annuity?

The amount depends on the contractual objective.

For example, if you need an additional $2,000 per month of guaranteed lifetime income, you can determine how much premium is required to produce that amount.

There's no reason to automatically place your entire portfolio into annuities.

Identify the financial problem and determine the amount necessary to solve it.

Start With Two Questions

Before comparing annuities, ask:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

Those answers narrow the available products considerably.

If you need lifetime income immediately, you'll compare different solutions than someone who needs income ten years from now.

If you need principal protection instead of income, you'll look at another category entirely.

Where to Compare Fixed Annuities

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

You can compare guaranteed lifetime income, current MYGA rates, and other annuity solutions based on the specific financial objective you're trying to solve.

The Bottom Line

Fixed annuities provide contractual guarantees.

Those guarantees generally fall into four categories: Principal Protection, Income for Life, Legacy, and Long-Term Care.

Among those benefits, lifetime income is particularly important because an annuity can contractually guarantee payments for as long as you live.

The question isn't whether fixed annuities provide benefits. It's which contractual benefit you actually need and which type of fixed annuity provides it most efficiently.

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