Fixed Annuities: How They Are Taxed | Insurance

Fixed Annuities: How They Are Taxed

Written by John C. Ryan

Sunday, 14 February 2010 19:47

by JohnC.Ryan

Fixed annuities are no longer just a method of providing an income you can't outlive. Many of the newer fixed annuities provide investors with the same risk free investment they have when they use a CD and yet offer other bonuses such as tax-deferred growth.

While the growth in fixed annuities have always been tax-deferred, their popularity is only recent. Earlier products, often designed for smaller investments, didn't catch the eye of those with higher amounts of income and investment potential. Changes to the products in the past few decades made them far more attractive to higher income groups.

Changes in the tax law from FIFO to LIFO made a dent in the annuity business. FIFO rules were first in, first out. This simply meant that the principle, the first in, counted for tax purposes as the first money out of the contract. When it changed to LIFO rules, last in, first out, the first money removed was always interest. Insurance companies found themselves losing ground in the annuity business because of this tax law change.

But with the second concept the last in i.e. the first money removed became the interest. This became a major blow for insurance companies which had significant downfalls in business as far as annuities were concerned.

Considering these, one after another, insurance companies began to improve their policies to compensate for the changes and capture their fair share of the public's invested money. The first product they revamped in order to increase their assets under management was the fixed annuity.

Fees changed from front end loaded to surrender fees. People could now see immediate growth and only if they removed their funds before an agreed time, did they experience a fee.

Now the fixed annuities have taken more or less the same character as the CDs. On top of that they enjoyed tax deferment which was not available with CDs. They still maintained payments to the contract after an initial deposit but the entire structure of the contract went for a huge makeover. Investors started pouring surplus funds into these reliable funds.

Besides competing within the industry, the insurance companies now competed with other financial institutions such as banks. They created the fixed annuity that had the benefits of a CD and more. Unlike a CD, a fixed annuity doesn't "roll over" into another surrender period. Once you reach the end of the surrender schedule, the money is always available penalty free.

Other changes to the fixed annuities that made it fierce competition for the banks was accessibility of funds before the end of the penalty phase. CDs and fixed annuities alike offer the ability to access interest but many of the fixed annuities also allow the owner to access some of the principal. The most liberal contracts allow a 10 percent cumulative access to the total value of the contract each year. The cumulative verbiage simply means if you don't use it one year, you don't lose that amount but it carries over to the next year.

All the new strategies developed by the insurance companies to boost interest in fixed annuity have worked marvels. People today are more informed of the benefits of the fixed annuity; only thing is you need to find one that suits your needs the most. Fixed annuities happen to be part of every investor's plan.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

John C. Ryan authors content on with a goal of teaching investors how to intelligently invest for retirement. One of his most common subjects, is the often discussed fixed annuities and their merits. You can learn more about the positives and negatives of the fixed annuity or get a quote at his website.