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Our Articles With the recent decline and volatility in the stock market, many investors are looking at fixed annuities as a means of receiving a guaranteed, fixed return on their investment.  A deferred annuity is a contract between a policy owner (investor) and an insurance company. In a typical situation, the investor contributes funds to the annuity. These funds are allowed to grow, on a tax-deferred basis, for a period of time. At some future date, the policy may be "annuitized", which simply means the accumulated funds are paid out to the policy owner, generally in the form of periodic payments over a specified period of time. It is during this stage that income taxes are due on the withdrawn earnings.In a fixed annuity, the issuing life insurance company will guarantee the investor a certain annual interest rate for a specified period of time, generally 5 to 10 years. These rates are typically higher than prevailing interest rates on bank certificates of deposit. Some contracts are currently offering 6.5% (or higher) in the first year; and don't forget, these are tax-deferred returns! For those already maximizing contributions to IRA's, 401(k)'s, 403(b)'s, etc., the fixed annuity provides an additional means for investing funds on a tax-deferred basis. There is virtually no limit on how much one can contribute. Contributions are not tax deductible. As with everything in life, there is no free lunch. Most annuities impose a surrender charge if withdrawals in excess of a certain amount occur in the first 5 to 7 years of the contract. These charges typically decline over time. In addition, the "guaranteed" interest rates are dependent upon the financial strength of the insurer. It's important, therefore, to review the financial stability of the issuing life insurance company prior to investing. For the fairly conservative and risk averse investor, the fixed annuity can provide relatively safe and competitive investment returns and also serve as an important piece of a well-diversified portfolio. Ronald M. Milone, MBA, CPA, CFP® Registered Investment Advisor Representative Principal Konowitz, Kahn & Company, P.C.
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