496 / What is a fixed annuity?

A “fixed annuity” is an annuity contract in which the value is reckoned in fixed units (in the U.S., U.S. dollars). By contrast, the value of a “variable” annuity is determined by the dollar value of its accumulation or annuity units, the value of which can and will vary over time.

There are three classes of fixed annuities: (1) fixed immediate annuities, (2) fixed deferred annuities, and (3) fixed deferred income (“longevity”) annuities.

A fixed immediate annuity is one that pays a defined amount of income each period (which may be level or increasing in accordance with a “cost of living” provision), commencing no later than one year after purchase, and persisting for a defined period (which may be the lifetime(s) of the annuitant(s)).

A fixed deferred annuity is one providing for the payment of an annuity income at some later time (perhaps many years after purchase); during the accumulation period (from purchase to the annuity starting date (ASD)), the contract will earn interest.

There are two kinds of fixed deferred annuities: (1) the fixed declared rate deferred annuity, and (2) the fixed index annuity.

The fixed declared rate deferred annuity will credit a rate of interest each year during the accumulation period. The interest rate is declared at the beginning of each period (usually, one year) and may change, though not below the guaranteed minimum interest rate.

The fixed index annuity is identical to the declared rate annuity except that interest is credited retroactively at the end of each period (of one or more years) and will vary according to the increase in the value of one or more specified external market indices (often, the S&P500®). Like the declared rate contract, a minimum interest rate is guaranteed, provided that the contract is held for the entire surrender charge period.

The third basic class of fixed annuities is the fixed deferred income, or “longevity” annuity. This is a contract guaranteeing a certain amount of income for a specified period (or lifetime(s)) to commence at some specified later age, usually an advanced age. During the accumulation period, there is no interest crediting and the contract may terminate without value if the annuitant dies prior to the ASD, although some contracts provide for a pre-ASD death benefit.