Fact or Fib?

Fibs or Facts for Fixed Annuities

March 13, 2023 | TS Prosperity Group

With market volatility being a major hot topic in economic news, there has been a resurgence of Fixed Annuity purchases to combat the investment risk of the stock market. But how much truth do we know about these “ultra-conservative” options? Let’s take a look at some of the most common buzz-phrases for Fixed Annuities and uncover whether they are Fibs or Facts!

#1: A Fixed Annuity is an Investment.


A fixed annuity is an insurance product sold by a licensed agent who earns a commission on that policy. The very definition of an annuity is the “transfer of risk between an individual and an insurance company”. An individual’s risk may be outliving their income or having income gaps and the insurance company insures those risks by guaranteeing income payments to the annuitant (policy owner).

In a fixed annuity, income payments do not change and a rate of return is guaranteed on the annuitant’s contribution(s). While the return that a fixed annuity gets comes from an investment portfolio, the actual payout to an annuitant is provided by the insurance company from which the policy is purchased. This means that the investment risk is mostly assumed by the insurance company.

#2: Fixed Annuities are GUARANTEED.


First off, all annuity products are insurance contracts so they are NOT FDIC insured or insured by any other government agency. The purpose of a fixed annuity is to guarantee income for the annuitant. And a fixed annuity earns a guaranteed minimum interest rate as set by the insurance company the policy is purchased through. However, the safety of the principal and the annuity payout is reliant on the financial strength of the insurance company. So, it is essential for consumers to research the insurance company’s financial stability using independent insurance rating agencies such as: Moody’s, Standard & Poor’s, Fitch, and A.M. Best.

#3: You can NEVER outlive your Fixed Annuity income.


As long as your fixed annuity contract’s payout period is written as a “lifetime payout”, the annuitant can never outlive their fixed annuity income payment. In fact, one of the primary reasons that annuities were created was to provide “longevity insurance” for individuals who might have had the concern they would outlive their savings and/or retirement income. And the annuity payment that the insurance company comes up with for the annuitant? It’s all based on calculations that include the annuitant’s life expectancy and current economic conditions at the time of application.


#4: A Standard Fixed Annuity Contract will still payout after the annuitant dies.


A standard annuity contract will only pay out income payments as long as the annuitant is alive. Remember, a standard annuity contract is a life insurance contract that is based off of a single individual and only takes into consideration the annuitant’s life expectancy. If the annuitant wants annuity payments to continue after death, there are options available for different payout periods, but these options can either reduce the amount of the initial annuity payment and/or come by way of a rider (typically meaning an additional cost). An additional thing to keep in mind is that a premature death can make an annuity purchase a very costly transaction as the annuitant may not see their “return on investment”.


#5: A policy holder can access their money in a Fixed Annuity whenever needed.


A fixed annuity is an illiquid binding contract, meaning that the contract dictates how and when the annuitant is able to access their annuity payments and that assets are not easily or readily accessible without a substantial loss in value. Typically, fixed annuity contracts only allow for one withdrawal per year up to 10% of the account value by the annuitant; creating a substantial roadblock for an individual who may find themselves up against a financial emergency. In addition, there is also a surrender period—the amount of time the annuitant must wait until they can begin withdrawing funds without facing a substantial penalty.


#6: Fixed Annuities don’t come with additional fees or costs.


From hefty surrender charges to add-on riders at an additional fee, many annuity products cost more than just the contract’s face value. In some circumstances, some of the fees may be hidden (or not even disclosed at all), such as the commission, underwriting, and fund management. Be sure that you carefully read through your contract and ask questions to ensure you know where your money is being allocated and so you’re not surprised later on if you have to pay more than you bargained for.


#7: Fixed Annuity payments are still subject to taxes.


While fixed annuity earnings grow tax-deferred during the accumulation phase, once an annuitant takes any withdrawal (either via a one-time annual withdrawal or regular income payments) part or all of that money will be taxed.

If contributions are made to the fixed annuity with pretax dollars, then the entire withdrawal or annuity payment will be subject to taxes at the annuitant’s standard income tax rate.

If contributions are made to the fixed annuity with after-tax dollars, the annuitant is only taxed on the earnings, not the principal contribution amount. The insurance company uses an “exclusion ratio” to determine what percentage of the payment is taxable earnings and what part is the excluded principal contribution.

Plus, like other retirement plans (401[K], IRA’s, SEP’s, etc.) annuity holders that take withdrawals or payments under age 59 ½ are additionally subject to the standard 10% early withdrawal tax penalty by the IRS.

Fixed annuities may sound like a solid option, just be sure to be diligent and aware when deciding how to fill in income gaps or if longevity is a personal risk. At TS Prosperity Group, we take a holistic and team-based approach to review your long-term financial objectives and create a solution that addresses your personal risks and mitigates your investment risk—so you have a plan that gives you better rewards for your future, allowing you to sleep better at night. Contact us at (844) 487.3115 and let’s talk through all the options you have.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice.

Investment products offered by TS Prosperity Group are: Not a Deposit • Not FDIC Insured • Not Insured by any Federal Government Agency • Not Guaranteed by the Bank • May Go Down in Value