Fixed Annuity

Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three or five years. Once the guarantee period is over, a new interest rate is set for the next period.

This guarantee of both interest and principal makes fixed annuities somewhat similar to Certificates of Deposit (CDs) purchased from a bank.

Unlike a typical CD, however, an annuity is not backed by the Federal Deposit Insurance Corporation (FDIC); its security is directly related to the financial health of the insurance company that issues the annuity.

Fixed Interest Annuities are issued by an insurance company, guarantee a rate of interest for a set period of time. Fixed interest annuities, like CDs, are generally considered low risk and have limited liquidity. Generally, interest under an annuity is not taxed until withdrawn. As with CDs, early withdrawal charges may apply. Also a 10% tax penalty generally applies to the taxable portion of a withdrawal taken prior to age 59 1/2.

Fixed and Variable Annuity Expenses

Variable annuities usually have more features and higher fees than fixed annuities. With some fixed annuities, contract expenses - such as maintenance and contract fees - are taken into consideration when the company declares periodic interest rates or determines the payment amount. Surrender changes may also apply.

Variable annuity fees are more complicated. They may include an annual contract charge that covers administrative expenses and surrender fees, as well as a mortality and expense risk charge. Variable annuities charge this latter fee to guarantee the death benefit, the availability of payout options and the level of expenses.

In addition, a variable annuity has fees for the management and operating expenses of the funding options in which your money is invested. These charges pay for everything from the fund manager's salary to the costs of printing the fund prospectus.