An Introduction To Fixed-Rate Annuities And Their Risks

1 December 2015
 Categories: , Blog


If you have a passing interest in investing, then you might have heard of something called an annuity. You might have even heard that annuities offer an excellent way to make reliable money. To help you get a better idea of what an annuity is and why you might want one, here is a general introduction to the fixed-rate annuity:

So what is a fixed-rate annuity?

In the simplest terms, an annuity is where you pay a fixed amount of money upfront in exchange for a series of payments later. These payments generally last for the rest of your life. There are many different types of annuities. Some start paying you from the moment that you invest, while others do not kick in for several years. Some pay you in a fixed amount, while others are variable. Fixed-rate annuities are of the former variety, and will always pay a specific amount of money.

The advantages of an annuity are pretty obvious, since they basically take money out of your hands today in order to get you more money down the road. This can help people that have uncontrollable spending habits and can help hedge your future against uncertainty. Therefore, it's a good idea to take a look at the potential risks before making any commitments.

What are the risks of annuities?

As far as general annuity risks go, you mainly need to worry about the rate of inflation, the risk of you dying, and the risk of the payer going out of business.

  • The rate of inflation is fairly simple to understand, since there is a chance that your annuity could become much less valuable than the money that you paid for it. Of course, you don't have much control over the rate of inflation, but you can talk to a financial adviser to help predict whether or not the current economy is ideal for fixed annuities.
  • If you do die, then the annuity payments will stop. They will not transfer to your dependents, which means that the money you spent on the annuity will be totally wasted. In most cases, you can't really predict when you will die, but this means that annuities are not a great option if you are in poor health or very old. If that is the case, then you probably want to use an investment option that can be transferred to your dependents.
  • On a similar note, the company that is paying your annuity could go out of business. In such a situation, you probably won't have a guarantee that the payments will continue. This is much harder to predict than anything else, since it can be very hard to predict which companies will be in business in ten or fifteen years.

Ultimately, these risks should be considered, but they don't apply to all situations. In many cases, fixed-rate annuities are a great way to ensure that you will continue to receive money for the rest of your life.