Fixed annuity

A fixed annuity has two phases. During accumulation, the owner pays premiums and the insurer credits interest at a declared rate that can never fall below the contract's guaranteed minimum. During annuitization, the accumulated value is converted into a stream of payments whose dollar amount is set at the outset and does not change. Because the insurer promises those numbers, the contract's money sits in the company's general account, and payments depend on the insurer's claims-paying ability.

That structure is what separates a fixed annuity from a variable annuity. A variable annuity's premiums go into a separate account of subaccounts holding portfolios of securities; the contract value and the payout both fluctuate with investment performance, and the owner carries the investment risk. A variable annuity is a security — it requires a prospectus and a securities registration to sell — while a fixed annuity is an insurance product regulated by state insurance departments and sold with a life insurance license. An equity-indexed annuity sits between the two, crediting interest tied to an index subject to caps and participation rates, with a guaranteed floor.

The trade-off is predictability against purchasing power. A fixed annuity protects principal and produces a payment the annuitant can count on, which suits a conservative retiree with limited tolerance for market losses. Its weakness is inflation risk: a level payment buys less each year as prices rise. Surrender charges, tax deferral during accumulation, and ordinary income taxation of the earnings portion of each payment apply to fixed and variable contracts alike.

Suitability is where exams focus. The Series 65 and Series 66 test the fixed-versus-variable distinction, who bears investment risk, general account versus separate account, and which client profile fits which contract. The SIE approaches the same material from the variable annuity side, so know how the two products differ before test day.