Fixed Annuities Explained (2025 Guide)

Planning for retirement in today’s world often feels like navigating choppy waters. Market fluctuations, economic uncertainty, and the simple fact that people are living longer can make securing a stable financial future seem challenging. If you’re looking for predictability and safety for a portion of your retirement savings, a fixed annuity might be a tool worth considering. But what exactly is it, and how does it work?

This guide provides a comprehensive overview of fixed annuities, updated for 2025, to help you understand their features, benefits, and potential drawbacks. Making informed decisions about your financial future is crucial, and that’s where understanding your options comes in. It’s also why having the right partner matters. At Insurance By Heroes, an independent insurance agency founded by a former first responder and military spouse, we understand the importance of security and reliable planning. Our team, many with backgrounds in public service, is dedicated to helping you navigate the complex world of insurance and retirement products. Because we work with dozens of top-rated insurance carriers, we aren’t tied to a single company’s offerings. Instead, we shop the market to find solutions tailored specifically to your individual needs and goals.

What is an Annuity? The Big Picture

Before diving specifically into fixed annuities, let’s clarify what an annuity is in general. At its core, an annuity is a contract between you (the contract owner or annuitant) and an insurance company. You make payments to the insurer (either as a lump sum or over time), and in return, the insurer agrees to make payments back to you at some point in the future. These future payments can be structured in various ways, often designed to provide a stream of income during retirement.

Annuities typically have two main phases:

• Accumulation Phase: This is the period when you are funding the annuity and the money within the contract is growing, usually on a tax-deferred basis.
• Payout (or Annuitization) Phase: This is when you start receiving payments from the insurance company according to the terms of your contract. Options can range from receiving payments for a specific number of years to receiving payments for the rest of your life.

There are several different types of annuities, each with its own way of calculating growth and handling risk. The main categories include fixed, variable, and fixed indexed annuities. Our focus here is on the fixed annuity.

Decoding the Fixed Annuity

A fixed annuity is often considered the simplest and most straightforward type of annuity. Its defining characteristic is that the insurance company guarantees a minimum interest rate on your investment for a specified period. This means your money grows at a set, predictable rate, and your principal investment is protected from market downturns (subject to the claims-paying ability of the issuing insurance company).

Think of it like a Certificate of Deposit (CD) issued by an insurance company rather than a bank, but with some key differences we’ll explore later, particularly regarding taxation and payout options. The primary appeal of a fixed annuity lies in its safety and predictability.

Here’s how it contrasts briefly with other types:

• Variable Annuities: Offer the potential for higher returns because your money is invested in sub-accounts similar to mutual funds. However, they also carry market risk, meaning your account value can decrease if the underlying investments perform poorly. They are generally more complex and have higher fees.
• Fixed Indexed Annuities (FIAs): Offer growth potential linked to the performance of a market index (like the S&P 500), but typically with limits (caps, participation rates) on the upside. They also provide principal protection against index declines. They are more complex than fixed annuities but less risky than variable annuities.

Understanding these distinctions is vital because the right type of annuity – or whether an annuity is appropriate at all – depends entirely on your personal financial situation, risk tolerance, and retirement goals. This is a core reason why working with an independent agency like Insurance By Heroes is beneficial. We don’t have a vested interest in promoting one specific type or one specific company’s product. Our loyalty is to you, our client. We leverage our access to numerous carriers to find the fixed annuity (or other solution) that genuinely aligns with your objectives.

How Fixed Annuities Work: Step-by-Step

Understanding the mechanics of a fixed annuity can help you assess if it fits into your financial strategy.

1. Funding the Annuity

You can typically purchase a fixed annuity in one of two ways:

• Single Premium: You make one lump-sum payment to the insurance company. This might come from savings, the sale of an asset, or rolling over funds from another retirement account like a 401(k) or IRA.
• Flexible Premium: You make a series of payments over time. This option might be suitable if you want to contribute smaller amounts periodically.

2. The Accumulation Phase: Guaranteed Growth

Once funded, your money enters the accumulation phase. During this time, the insurance company credits interest to your account. Key features of this phase include:

• Guaranteed Minimum Interest Rate: The contract specifies the lowest rate your money will ever earn. This provides a safety net.
• Current Interest Rate: The insurance company typically declares a “current” interest rate, which may be higher than the guaranteed minimum. This current rate can be guaranteed for an initial period (e.g., one, three, five, or more years – see MYGAs below) and may then be adjusted periodically by the insurer, though it will never fall below the contractual minimum guarantee.
• Tax Deferral: One of the significant advantages of annuities is that the interest earned within the contract is not taxed annually. It grows on a tax-deferred basis, meaning you don’t pay income tax on the earnings until you start withdrawing the money. This allows your funds to potentially compound faster than they would in a comparable taxable account.

3. The Payout Phase: Receiving Income

When you’re ready to start receiving money (often in retirement), you can typically choose from several payout options. This process is often called “annuitization,” although you don’t necessarily have to annuitize to access your funds.

• Systematic Withdrawals: You can often take partial withdrawals from the accumulated value, subject to potential surrender charges and income tax on the earnings portion. Many contracts allow a penalty-free withdrawal of a certain percentage (e.g., 10%) each year.
• Lump Sum: You can choose to take the entire accumulated value as a single payment. However, this would make all the deferred earnings taxable in that year, potentially pushing you into a higher tax bracket. Surrender charges might also apply if taken within the surrender period.
• Annuitization Options: This involves converting your accumulated value into a stream of regular payments. Common options include:
  • Period Certain: You receive payments for a fixed number of years (e.g., 10 or 20 years). If you pass away before the period ends, your beneficiary receives the remaining payments.
  • Life Only: You receive payments for as long as you live. Payments stop upon your death. This option typically provides the highest payment amount but carries the risk that if you die early, the total payout could be less than the annuity’s value.
  • Life with Period Certain: A combination option. You receive payments for life, but if you die within a specified period (e.g., 10 years), your beneficiary receives payments for the remainder of that period.
  • Joint and Survivor: Payments continue for as long as either you or your designated joint annuitant (usually a spouse) is alive. Payments might reduce after the first person passes away.

The decision of how and when to take payments is crucial and has significant financial and tax implications. Again, personalized guidance is essential here. Insurance By Heroes can help you understand the payout options offered by different carriers and how they might fit into your overall retirement income plan.

The Role of the Insurance Carrier

It’s important to remember that all guarantees associated with a fixed annuity—the principal protection, the minimum interest rate, the future income payments—are backed by the financial strength and claims-paying ability of the issuing insurance company. This differs from bank products like CDs, which are typically insured by the FDIC up to certain limits. While insurance companies are regulated at the state level and state guaranty associations provide a safety net, relying on a financially robust insurer is paramount. This is another area where an independent agency adds value. At Insurance By Heroes, we carefully vet the dozens of carriers we partner with, considering their financial ratings and stability, ensuring we place our clients with reputable companies.

Key Benefits of Fixed Annuities

Fixed annuities offer several attractive features, particularly for safety-conscious individuals:

• Principal Protection: Your initial investment (premium) is generally protected from loss, provided you hold the contract according to its terms and rely on the insurer’s backing. This can provide peace of mind, especially in volatile markets.
• Guaranteed Growth Rate: You know the minimum interest rate your money will earn. This predictability makes financial planning easier compared to investments with fluctuating returns.
• Tax-Deferred Growth: Earnings accumulate without being taxed year after year. This allows for potentially greater compounding over time compared to taxable investments earning the same rate of return. Taxes are only due when you withdraw the earnings.
• Predictable Retirement Income: The option to annuitize provides a way to create a guaranteed income stream you cannot outlive (with life contingency payout options), helping to cover essential expenses in retirement.
• Simplicity: Compared to variable or indexed annuities, fixed annuities are generally easier to understand. The terms, guarantees, and growth mechanics are relatively straightforward.
• Potential Death Benefit: Most fixed annuities include a death benefit. If you pass away before annuitizing or withdrawing all funds, your designated beneficiary typically receives at least the accumulated value or the total premiums paid, whichever is greater, avoiding probate. (Note: While avoiding probate is common, the death benefit may still be subject to income tax for the beneficiary on the earnings portion).

Potential Drawbacks and Considerations

While fixed annuities offer valuable benefits, they also have limitations and potential downsides to consider carefully:

• Lower Growth Potential: The trade-off for safety and guarantees is typically a lower potential return compared to investments exposed to market risk, such as stocks or variable annuities. Over long periods, fixed annuity returns may not keep pace with inflation.
• Inflation Risk: Because the interest rate is fixed (or adjusts within a limited range after an initial term) and payout amounts (if annuitized) can be fixed, the purchasing power of your annuity funds or income stream can erode over time due to inflation.
• Liquidity Constraints (Surrender Charges): Fixed annuities are designed as long-term retirement savings vehicles. If you need to withdraw more than the allowed penalty-free amount (often 10% per year) during the “surrender charge period” (typically lasting several years, e.g., 3 to 10 years from purchase), you will likely incur a surrender charge, which is a percentage of the amount withdrawn. These charges usually decline over the surrender period.
• Taxation on Withdrawals: While growth is tax-deferred, withdrawals of earnings are taxed as ordinary income, potentially at a higher rate than long-term capital gains. Furthermore, if you take withdrawals before age 59.5, you may face an additional 10% federal tax penalty on the earnings portion, unless certain exceptions apply.
• Fees and Charges: While basic fixed annuities often have fewer explicit fees than variable annuities, some may have administrative fees or charges for optional riders (add-on benefits). Be sure to understand any potential costs. Surrender charges are the most significant potential cost for early access.
• Insurer Financial Strength Risk: As mentioned earlier, the guarantees are backed by the insurance company. While insurer insolvencies are rare, it’s crucial to choose a highly-rated, financially stable company. This underscores the importance of working with an agency like Insurance By Heroes that prioritizes carrier due diligence across our wide network of partners. We help you assess this critical factor.

Who is a Good Candidate for a Fixed Annuity?

A fixed annuity isn’t right for everyone, but it can be a suitable choice for certain individuals:

• Conservative Investors Nearing or In Retirement: Those who prioritize capital preservation and predictable returns over high growth potential often find fixed annuities appealing.
• Individuals Seeking Safety of Principal: If protecting your initial investment from market losses is a top priority, a fixed annuity offers this guarantee (backed by the insurer).
• Those Who Have Maxed Out Other Retirement Accounts: If you’ve already contributed the maximum allowed to tax-advantaged accounts like 401(k)s and IRAs, a non-qualified fixed annuity offers another way to achieve tax-deferred growth.
• People Needing a Guaranteed Income Floor: If you want to ensure a certain level of predictable income in retirement to cover essential expenses, annuitizing a fixed annuity can provide that security, supplementing Social Security or pensions.

However, suitability is deeply personal. Your age, time horizon, liquidity needs, risk tolerance, existing assets, income sources, and tax situation all play a role. For instance, a younger investor with decades until retirement might prioritize growth potential over guarantees. Someone needing ready access to their funds might be deterred by surrender charges. This is precisely why personalized advice is non-negotiable. The team at Insurance By Heroes, with backgrounds rooted in service and understanding diverse needs (including those of fellow first responders, military families, and educators), takes the time to understand your unique circumstances. We don’t believe in one-size-fits-all solutions. Our independence allows us to survey the offerings of dozens of carriers to find a strategy – whether it includes a fixed annuity or not – that truly serves your interests.

Fixed Annuities vs. Other Common Savings Tools

How does a fixed annuity stack up against other familiar options?

• Fixed Annuities vs. Certificates of Deposit (CDs):
  • Similarities: Both offer principal safety and a fixed rate of return for a set term.
  • Differences: Annuity earnings grow tax-deferred; CD interest is typically taxed annually. Annuities offer annuitization options for lifetime income; CDs do not. Annuities may have surrender charges for early withdrawal; CDs have early withdrawal penalties. CDs are typically FDIC-insured (up to limits); annuities are backed by the insurer and state guaranty associations (with limitations). Annuities often offer slightly higher rates than CDs of comparable terms, partly due to the longer-term nature and liquidity constraints.
• Fixed Annuities vs. Bonds:
  • Similarities: Both can provide a stream of income and are generally considered lower risk than stocks.
  • Differences: Individual bonds or bond funds can lose value if interest rates rise or the issuer defaults (unless held to maturity for individual bonds). Fixed annuities guarantee principal (subject to insurer solvency). Annuities offer tax deferral; bond interest is generally taxable unless it’s a municipal bond. Annuities offer lifetime income options. Bonds are generally more liquid, though selling before maturity can result in gains or losses.
• Fixed Annuities vs. Variable Annuities:
  • Core Difference: Fixed annuities offer guaranteed returns and principal protection. Variable annuities offer potential for higher market-based returns but also carry the risk of loss of principal. Variable annuities typically have more complex features and higher fees.
• Fixed Annuities vs. Fixed Indexed Annuities (FIAs):
  • Core Difference: Fixed annuities offer a set, guaranteed interest rate. FIAs offer growth potential linked to a market index (like S&P 500), usually with caps or participation rates limiting the upside, but also protect principal from index declines. FIAs are more complex than standard fixed annuities.

Navigating these choices requires clarity on your goals. Do you prioritize absolute safety and predictability (favoring fixed annuities or CDs)? Or are you willing to accept some complexity or market exposure for potentially higher returns (favoring FIAs or variable annuities, or direct market investments)? Because Insurance By Heroes is independent, we can objectively discuss the pros and cons of each option available through our network of carriers, helping you make an informed comparison based on your specific needs.

Understanding Fixed Annuity Interest Rates

The interest rate is a key component of a fixed annuity’s appeal.

• How Rates Are Set: Insurers determine fixed annuity rates based on several factors, primarily the current interest rate environment (what they can earn on their own conservative investments, often high-quality bonds), the duration of the rate guarantee, and their operational costs and profit margins.
• Initial Rate vs. Renewal Rate: Many fixed annuities offer an attractive initial interest rate guaranteed for a specific period (e.g., 1, 3, 5 years). After this initial term, the rate may adjust annually, based on prevailing rates and the insurer’s discretion, but it will never fall below the minimum rate guaranteed in the contract.
• Multi-Year Guaranteed Annuities (MYGAs): These are a popular type of fixed annuity specifically designed to offer a competitive interest rate guaranteed for the entire surrender charge period (e.g., a 5-year MYGA guarantees the rate for all 5 years). They function much like a CD but with tax deferral. MYGAs offer high predictability during the guarantee term.

Comparing rates across different companies and contract terms is essential. An independent agency like Insurance By Heroes excels here, as we can quickly survey rates from the dozens of carriers we represent to find competitive options for the term you desire.

The Insurance By Heroes Advantage: Service and Independence

Choosing the right financial product is only part of the equation; choosing the right partner to guide you is equally important. At Insurance By Heroes, our foundation sets us apart.

Founded by a former first responder and military spouse, and staffed by professionals who often share backgrounds in public service, we bring a unique perspective built on integrity, commitment, and understanding the value of security. We know the importance of reliable plans and dependable support, especially when it comes to financial well-being.

Our independence is your advantage. We are not captive agents required to push products from a single company. Instead, we maintain relationships with dozens of the nation’s top-rated insurance carriers. This allows us to:

• Shop the Market: We compare fixed annuity rates, features, contract terms, and carrier financial strength across multiple insurers to find the best fit for you.
• Offer Objective Advice: Our recommendations are based on your needs, not on carrier quotas. We’ll tell you if a fixed annuity seems like a good fit, or if another strategy might be more appropriate.
• Tailor Solutions: We recognize that every client’s situation is unique. Whether you’re a fellow first responder, a military family, an educator, or anyone seeking sound financial strategies, we listen to your goals and craft personalized recommendations.
• Simplify Complexity: Annuities can seem confusing. We break down the details in clear, understandable language, ensuring you feel confident in your decisions.

Not every insurance product or carrier is suitable for every person. Factors like your age, financial goals, risk tolerance, and even the state you live in can influence which options are best. Insurance By Heroes navigates this complexity on your behalf, leveraging our extensive network and commitment to service.

Is a Fixed Annuity Right for Your Retirement Plan?

To determine if a fixed annuity aligns with your financial objectives, consider these steps:

1. Assess Your Risk Tolerance: How comfortable are you with potential market fluctuations versus the certainty of a fixed return?
2. Define Your Goals: Are you primarily seeking principal protection, tax-deferred growth, or a guaranteed future income stream? What is your timeline?
3. Consider Liquidity Needs: Will you potentially need access to these funds before the surrender period ends? Can you accommodate the withdrawal restrictions?
4. Evaluate Your Existing Portfolio: How would a fixed annuity complement your other investments and income sources (Social Security, pension, 401(k), IRA)?
5. Seek Professional Guidance: Discuss your situation with a qualified and trusted financial professional or insurance agent who understands annuities and puts your interests first.

Take the Next Step Toward Financial Security

Understanding fixed annuities is the first step. Determining if one fits into your specific retirement strategy requires a closer look at your personal circumstances and the options available in the market.

Ready to explore if a fixed annuity can bring stability and predictability to your financial future? The dedicated team at Insurance By Heroes, founded by service members for service members and our communities, is here to provide clarity and personalized guidance. Because we are an independent agency working with dozens of top-rated carriers, we can objectively compare fixed annuity options to find the one that truly aligns with your unique needs and goals. We do the shopping so you don’t have to. Let us put our commitment to service and financial expertise to work for you.

Get your personalized, no-obligation fixed annuity quote today by filling out the secure form on this page. Start building a more predictable financial future with Insurance By Heroes.