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A fixed annuity is a contract between an annuity provider and annuitant that offers fixed returns and payments to annuitants in exchange for a single premium or series of premiums. Fixed annuities are typically characterized by stable returns and low risk. The financial risk of investing in fixed annuities is so low that they are virtually no-risk financial products.

There are several variations within the realm of fixed annuities. Deferred fixed annuities and immediate fixed annuities constitute one dichotomy. With deferred fixed annuities, the annuity provider applies fixed rates of return during the accumulation and payout phase. Fixed immediate annuities use a fixed payout rate that is determined on the basis of a number of factors- some of which are negotiable.

You can also categorise annuities according to the period that they payout. Life annuities provide a guaranteed lifetime income for the annuitant, while term certain annuities provide payouts for a specified period. With fixed annuities, as with annuities in general, a longer annuitization phase results in a lower fixed annuitization or payout rate.

Life annuities may be strict investments or may contain insurance components (life and health). A fixed annuity that does not involve insurance components is called a Straight life annuity. With Term certain annuities, the annuitant risks ceding annuity savings to the insurer in the event of uncertain death. Term certain annuities are less expensive than life annuities (even straight life annuities) because they do not contain elements of insurance and are not dependent on the condition of the annuitant.

Unlike variable annuities, fixed annuities generally operate on the basis of declared interest. The annuity provider can state the rate of return in the contract or at least a minimum rate. In practice, while the fixed annuity rate rarely fluctuates, it can change from year to year at the annuity provider's discretion. However, the returns on a fixed annuity are rarely volatile, especially when declared interest rates are only marginally higher than base guaranteed rates.

Fixed annuities are regulated by insurance regulators only. The regulators are responsible for safeguarding fixed annuity funds by enforcing guidelines and regulations pertaining to fixed annuities. Fixed annuity fund managers are restricted in terms of how they can invest fixed annuity funds, which helps to maintain the risk-free nature of fixed annuities.

While fixed annuities are safe, they expose the annuity investor to risks associated with moderate returns (inflation and purchasing power risk) and longevity. However, the structure and regulation of fixed annuities ensure that the fixed annuity investor would not easily lose a dime. With that being stated, a fixed annuity is only as good as its terms and conditions, how well it suits your needs and the strength of the company providing it.

Learn more about this author, Darrell Victor.
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