Fixed Annuity

A fixed annuity is the plainest thing an insurance company sells. You hand over a premium, the insurer credits interest at a rate it declares, and the contract states the minimum rate it can ever credit. Nothing about your return depends on how markets behave. The word "fixed" refers to the crediting method, how value grows, not to when income begins, which is a separate choice between an immediate annuity and a deferred annuity. That is also why "fixed indexed annuity" is not a contradiction in terms: it borrows the "fixed" label because the contract has a floor, even though what it actually credits is contingent on a market index.

There are two shapes of declared rate, and the difference matters more than the headline number. A multi-year guaranteed annuity, universally called a MYGA, guarantees one rate for the whole term, typically three to ten years. What you see is what you get, and the contract is genuinely simple to compare: term, rate, surrender schedule, insurer. An annual-renewal fixed annuity credits a rate for one year and then resets to whatever the insurer declares next, bounded only by the contractual guaranteed minimum. That minimum is often far below the first-year rate, so a generous opening rate can quietly become an ordinary one in year two. If you are comparing fixed annuities, the first question is which of these two you are being shown.

The comparison people actually want is against a bank certificate of deposit, and it turns on two real differences. Insurance: a CD at an insured bank carries FDIC coverage of $250,000 per depositor, per insured bank, per ownership category. An annuity does not — the Federal Deposit Insurance Corporation states plainly that annuities are not covered even when purchased through a bank. What stands behind a fixed annuity is the issuing insurer's own financial strength, with a backstop from the state guaranty association if the insurer fails. Those associations exist in every state, but their coverage limits are set state by state, so there is no national figure to quote; check your own state's association before sizing a premium. Taxes: in a non-qualified contract (money that has already been taxed), a fixed annuity's interest compounds tax-deferred until you take it out, while CD interest is taxable in the year it is credited even if you leave it in the account. That deferral is the fixed annuity's genuine structural advantage over a CD, and the reason a slightly lower headline rate can still come out ahead for a taxable saver.

What this page does not cover: when income starts and what a payout looks like (see immediate annuity and deferred annuity), how gains are taxed on the way out (see annuity), and what it costs to get out early: a fixed deferred annuity almost always carries a surrender charge schedule, which is the price of the guaranteed rate.

The mechanics are short. You pay a premium; the insurer credits the declared rate, compounding inside the contract; a surrender charge applies if you take more than the contract's free-withdrawal allowance before the term ends; at the end of the term you can withdraw, roll into a new contract, or convert the balance into income.

A hypothetical example, with a made-up rate purely to show the arithmetic: Ray, 62, puts $100,000 into a five-year MYGA crediting 5% annually. The contract compounds to $127,628 at the end of year five, a gain of $27,628, and none of that gain is taxed until he takes it out. Had he bought a five-year CD at the same 5%, he would have reached the same $127,628 before tax, but he would have paid tax on roughly $5,000 of interest in the first year, and a bit more each year after, so his after-tax result would be lower unless the CD's rate were higher. In exchange, the CD would have been FDIC-insured and the MYGA is not, and the MYGA's money is committed for five years.

Change one detail and the comparison changes: if the contract were an annual-renewal fixed annuity crediting 5% in year one, nothing guarantees year two. The only floor is the contract's stated guaranteed minimum, which is where you should look first.

Pros

• The credited rate is known in advance, so the contract is unusually easy to evaluate: term, rate, surrender schedule, insurer.
• Interest compounds tax-deferred in a non-qualified contract, unlike CD interest, which is taxed as it is credited.
• No market risk to principal from the crediting method itself, and a contractual minimum rate below which the insurer cannot go.
• A MYGA is one of the few annuity products a consumer can genuinely comparison-shop on price.

Cons

• Not FDIC-insured, even when sold through a bank. You are relying on the insurer, plus a state guaranty association whose limit varies by state.
• Surrender charges lock the money up for the term; getting out early costs real money.
• Gains come out as ordinary income, not at capital-gains rates, and gains taken before age 59 1/2 generally face an additional 10% tax.
• A declared rate that beats inflation today may not beat it for the whole term, and an annual-renewal contract can reset far lower after year one.
• Buying one inside an IRA adds no tax benefit, because the IRA already provides the deferral.