Fixed Term Annuity
Many options exist for retirement and long term investment. Some of these options have a potentially high rate of return but carry a significant level of risk, such as stocks. Others offer a fixed rate of return, typically somewhat low, but very little risk. A fixed term annuity falls into the latter category. To consider whether this is a good option, you must first understand what this investment vehicle is and how it works.
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Simply put, fixed term annuities (FTAs) are contracts you have with an insurance company. You give them your funds to manage and in return, they agree to provide you with a certain amount of return on that money. This means that regardless of whether they gain or lose money with your funds, you will receive a fixed rate of return. Most FTAs are payable even after death, so your beneficiaries would receive the rest of the payments if you passed away.
There are two types of FTAs to choose from. One will give you a set number of payments, and another will give you payments throughout your lifetime. You can also choose an immediate fixed annuity, where you turn over your entire lump sum investment and then receive payments, or a deferred fixed annuity, where you choose a length of time for your money to be invested and then have access to it again at the end of that time. This is somewhat similar to a certificate of deposit (CD) from a bank, except that you are receiving regular payments from the annuity while it is invested, instead of at the end as with a CD. Insurance companies do typically allow you access to up to 10% of the investment in a deferred fixed annuity without penalty.
When choosing an annuity, the rating of the insurance company should be considered. Since you are giving them your money in exchange for this long term return, you need to be sure they will still be in business when it's time to collect. Ratings in the A (excellent) and A+ (superior) are what you are looking for and there are hundreds available in the United States. Terms for the annuity range from 1 year to 35 years, with 5 to 20 years being most typical. Fixed term annuity rates at the current time range from around 5-7% for a 10 year term.
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What are the risks of an FTA? First, as mentioned, the insurance company could go out of business. Fixed annuities are not guaranteed by the FDIC like investments at a bank or financial institution. Annuities are in US dollars, so if the currency falls or fails, the investment could be lost. In addition, since early withdrawal is penalized, the annuity is not a liquid asset. After you have carefully considered the risks and benefits, many secure and trustworthy websites are available to help you select and purchase your FTA.
Source - thefixedannuities.com - 2009