What is a Fixed Annuity? - Definition, Pros & Cons

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you will understand the type of customer that will want to purchase a fixed annuity. You'll also learn how a fixed annuity can give you a guaranteed income in your retirement.

Definition

A fixed annuity is a contract between the annuitant, the owner of the annuity, and the insurance company in which the insurance company pays the annuitant a fixed amount each month or another regular interval for a set period of time or until a specific event occurs such as death. For example, a fixed annuity that lasts for 20 years will pay you a fixed income for 20 years at which point it will stop. A fixed annuity that lasts for life, on the other hand, will give you a fixed income until you die.

If you are looking into getting a fixed annuity, you'll find there are different kinds. There are straight life annuities that give you income until you die. Then there are health annuities that pay you more if you have a serious health condition that lowers your life expectancy.

In addition to the fixed life annuity, there are also term annuities that give you an income for a fixed amount of time.

Pros

No matter which annuity you choose, you will always get the same benefits from the annuity.

The first major benefit is that you know you will be getting a fixed income for as long as the annuity is active. Your income is not dependent on the ups and downs of the stock market.

Second, you don't have to invest a whole lot of money into an annuity to benefit from it. For example, according to The Vanguard Group, if you are looking to purchase an annuity that starts paying $1,000 per month when you are 85, all you need to invest is $26,894 when you are 65 and you will get that $1,000 per month income for life after you turn 85.

Cons

In addition to the benefits, you also have these same risks.

First, the benefit of a fixed income is also a risk. For example, if you get sick or lose your job, your need for extra income won't be factored in. Your monthly income will stay the same no matter what happens in your life. If nothing happens in your life, then this is not a risk. But if something does, then this can become a risk because your income from the annuity won't change.

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