Fixed Annuities Pros and Cons - We Teach You Fixed Annuities

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Pros and Cons of Annuities

As an investment product, annuities can meet a wide range of needs for investors of all stripes, but as is the case with any investment product, they may not be suitable for all investors. Investors need to weigh the pros and cons of any investment product in the context of their own particular needs and priorities. Only then can it be determined whether an investment is best suited, over any other alternative to any one type of investor.

The features and characteristics of annuities are unique enough to be able to evaluate them in light of most peoples’ circumstances. Here, we consider the pros and cons of annuities for people who meet the basic criteria as a potential annuity investor: high tax bracket, concerned with market volatility, concerned with safety of principal, long term time horizon, sufficient liquidity in other investments or savings, and fully utilized qualified retirement plans.

The Pros

Deferred taxes on earnings

The earnings in annuity accounts are given the same tax treatment as qualified retirement plans in that they are allowed to accumulate without being taxed currently. Although they will be taxed when they are withdrawn, earnings can compound more quickly during the accumulation phase of the annuity. Investors who pay taxes at the higher income tax rates will benefit more than those who are taxed at the lower rates.

Above market rates

Fixed annuity rates are determined by the issuing life insurer based on the returns they generate out of their own investment account. Because they invest in a range of fixed income securities, they have the ability to generate yields that are higher than current market interest rates. Historically, annuity rates have always been higher than the rates available on other fixed yield investments.

Minimum growth rates

Most annuities offer some sort of initial rate guarantee for a period of time. While the rate guarantee will eventually expire, and, the new rates can potentially be adjusted downward, they can’t fall below the minimum rate guarantee.

Capital preservation

The primary objective of the life insurance company is to preserve capital. They accomplish this by investing their assets conservatively and constantly monitoring their liquid reserves to ensure that there is always enough capital to cover all of its obligations. Additionally, most of the states provide protection in the form of guaranty fund that will cover annuity deposits. The coverage varies from state to state and ranges from $100,000 to $500,000.


Annuities are meant to be long term investments, however, they do include a withdrawal provision that allows for access to account values. They limit the withdrawals to 10% of the account value during the surrender period, over which they will charge a surrender fee. At the end of the surrender period, which range between five and 12 years, the funds are accessible without limit.

Income for life

Investors who are concerned with the possibility of outliving their income use annuities to secure an income for life. Essentially, annuities are insurance against the possibility of living to long.

The Cons

Tax Consequences

Annuity withdrawals are taxed as ordinary income. This could be a disadvantage if you find yourself in a high tax bracket in retirement.

IRS penalties

The IRS treats annuities similarly to qualified retirement plans, such as IRAs, in so far as early withdrawals are concerned. For any withdrawal made before the age of 59 ½, the IRS may levy a penalty of 10% of the withdrawal.

Surrender period

The withdrawal provision in annuities allows for access to funds, but if the withdrawal is made within the surrender period that exceeds 10% of the account value in a given year, a fee is charged. The fees are initially high, in the range of 6 to 12%, and then gradually drop each year of the surrender period until they disappear all together.


Annuities do have costs and expenses associated with them, and, in some instances, they can mount up pretty quickly. Because they are a form of insurance, there are mortality charges, and since they are issued as contracts, they do require some paper pushing that result in administrative fees. Fees are charged each year as a percent of the account value, ranging from .75% to 1.25%. Variable annuities have investment management fees, similar to those charged in mutual funds. These fees can range from .5% to 1.3% depending on the type of investments that are being managed.


For some annuity investors, the cons could possibly offset the pros to the extent in which they achieve no real advantage from investing in annuities. For example, if surrender fees are paid on withdrawals made during the surrender period, they could completely offset the advantages of tax deferral. Or, annuities held for a shorter period of time, may not allow the tax deferral of above market interest rates to accumulate to the point of offsetting the expenses of the contract.

For investors who can commit to a longer term time frame, from 12 to 20 years, the pros of annuities should always outweigh the cons, which is why it so important to evaluate annuities in light of your total financial situation. For the right investor, annuities can perform like no other investment.