These investments can pay slightly more than CDs and Treasury bonds, depending on the investment amount and prevailing interest rates. An investor who has a $100,000 CD maturing can move that entire amount into a nonqualified fixed annuity contract and have the entire amount start growing tax-deferred. It should be noted that fixed annuities are retirement savings vehicles, and any withdrawals that are taken from the contract by an investor who is younger than age 59 ½ will be subject to a 10% early withdrawal penalty.
However, many annuities offer annual withdrawals of 10% or less of the contract value without incurring a penalty. Fixed annuities are among the safer vehicles that you can invest in. Although they are not backed by the FDIC; they are backed by the financial strength of the life insurance carrier who issues the contract. And the life insurance company is required by law to have a cash reserve on hand that backs every fixed and indexed annuity contract that it issues. Furthermore, if the insurance carrier were to become insolvent, state guaranty associations would step in and cover any eligible contracts up to a specified amount. Investors can also mitigate risk by choosing a carrier with a high insurance company rating.
Fixed Annuity Benefits
Fixed annuities also provide some other advantages for investors. All types of annuity contracts, including fixed annuities, are exempt from the probate process. This means that the beneficiary that you specify on the fixed annuity contract will receive the proceeds from the annuity without this money having to go through the probate process, which can take a lot of time and money in some cases.
Many annuity contracts also provide at least a measure of protection from creditors and lawsuits. This protection varies somewhat from one state to another, so check with your state insurance commissioner to find out what level of protection they offer where you live. Additionally, interest that is paid on a fixed annuity will compound relatively faster because the contract will grow tax-deferred.
Fixed annuities can therefore be a good choice for conservative retirement savers looking for a better rate of return.
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