Although one of the easier financial concepts to understand once the basics have been covered, there is still quite a bit of confusion regarding the fixed income annuity. Annuities are actually one of the oldest financial instruments still available on the market. And while the roots can be traced back to Roman culture, the first annuities in America started popping up around the mid to late 18th century. Early in the 20th century, we started seeing these products offered in more places than just private groups as well.
The fixed income annuity refers to a financial product that is typically offered by insurance companies. On the very basic level, it is an agreement between the annuity owner and the insurance company in which the annuity owner agrees to pay for a set stream of income from the insurance company at a point in the future. This can either be a predetermined string of payments, or can be a fixed amount for the duration of the annuity owner's lifetime.
In this particular type of fixed annuity the income stream is a fixed dollar amount, and will not vary during the distribution phase of the contract. The insurance company agrees to make these set payments for the duration of the contract period. At the creation of the contract, the insurance company determines what they feel the income stream is worth, and presents a premium structure based on their specific criteria.
The criteria used for this calculation can vary from company to company, but the basics remain the same. In the case of a life annuity, the premium is based on the life expectancy of the annuitant. Other factors include rate of return, riders to the contract, duration, accumulations length, and a number of other key points. The good news is that the insurance company does this work for you and presents you with their proposals. For this reason, it is usually a good idea to shop around for fixed annuities before you commit to a contract.
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