6.2 Fixed and Immediate Annuities
Key Takeaways
- Fixed annuities guarantee principal and a minimum interest rate; premiums go into the insurer's general account and the insurer bears investment risk.
- Fixed annuities are not securities, so only a life license (no FINRA registration) is required to sell them.
- Immediate annuities (SPIAs) are always single premium and begin paying within one payment period, with no accumulation phase.
- Flexible and scheduled premium annuities are always deferred because deposits must accumulate before payout.
- The level payout of a fixed annuity exposes the annuitant to inflation (purchasing power) risk.
Fixed Annuities
A fixed annuity guarantees both a minimum rate of interest during accumulation and a fixed, level payment amount during the payout phase. The insurer bears the investment risk: premiums go into the insurer's general account, and the company guarantees the principal and a minimum interest rate regardless of how its investments actually perform.
Because the general account holds conservative bonds and mortgages, fixed annuities are considered safe, predictable products. They are NOT securities, so a producer needs only a life insurance license — not a securities (FINRA) registration — to sell them.
Guaranteed vs. Current Rate
Fixed annuities credit two interest rates:
- Guaranteed (minimum) rate — the floor the insurer contractually promises (e.g., 1%–3%). It can never be credited below this.
- Current rate — the higher rate the insurer actually credits based on present portfolio performance; it is reset periodically and is never less than the guaranteed rate.
Trap: The level payout of a fixed annuity exposes the annuitant to purchasing power (inflation) risk — a $1,000 monthly check buys less each year. The insurer assumes investment risk, but the annuitant retains inflation risk.
Immediate vs. Deferred (by Payout Timing)
Annuities are classified by when income begins:
| Type | Funding | Income Begins | Accumulation Phase? |
|---|---|---|---|
| Immediate (SPIA) | Single premium only | Within one payment period (≤ 1 year) | No |
| Deferred | Single or periodic | At a future date selected by owner | Yes |
A Single Premium Immediate Annuity (SPIA) is funded with one lump sum and begins paying within one payment interval — monthly payments start one month later, annual payments start one year later. There is no accumulation phase; the contract moves straight into the payout (annuity) phase.
An immediate annuity is the classic tool for a retiree who has a lump sum (e.g., a 401(k) rollover or inheritance) and wants income to start right away. By definition, the first payment must occur no later than one payment period after purchase.
Worked Example: SPIA Income
A retiree pays a $300,000 single premium for a SPIA. If the insurer's life-only payout factor for her age is $6.20 per $1,000 per month, her monthly income is 300 × $6.20 = $1,860 per month for life. Choosing a refund or period-certain option would lower this figure because the insurer guarantees payments beyond her death.
Funding Methods
Annuities are also classified by how they are funded:
- Single premium — one lump-sum deposit (the only way to fund an immediate annuity).
- Flexible premium — the owner makes varying deposits over time; only available with deferred annuities because the contract needs an accumulation phase to receive ongoing deposits.
- Level/scheduled premium — a set periodic deposit; also a deferred-only structure.
A single premium can fund either an immediate annuity (income now) or a deferred annuity (income later). Flexible and scheduled premiums, however, are necessarily deferred because there must be time to accumulate the deposits before payout.
Exam pairing trap: An immediate annuity is ALWAYS single premium. A flexible premium annuity is ALWAYS deferred. You cannot have a "flexible premium immediate annuity."
In a fixed annuity, where are premiums held and who bears the investment risk?
A single premium immediate annuity (SPIA) must begin making payments:
The General Account, Licensing, and an Inflation-Risk Worked Example
Because a fixed annuity guarantees principal and a minimum rate, its premiums sit in the insurer's general account, invested conservatively in bonds and mortgages. The insurer — not the owner — bears the investment risk, which is exactly why a fixed annuity is not a security and needs only a life license to sell. Memorizing this account/risk/licensing chain answers a cluster of exam items at once.
| Annuity type | Account | Investment risk | License needed |
|---|---|---|---|
| Fixed | General account | Insurer | Life only |
| Indexed | General account | Insurer (floor protects principal) | Life (+ suitability) |
| Variable | Separate account | Owner | Life + securities (FINRA) |
Worked example on the real weakness of a fixed annuity — purchasing-power (inflation) risk: a retiree receives a level $1,500 monthly fixed-annuity payment. At 3% annual inflation, that $1,500 buys about $1,500 ÷ (1.03)^10 ≈ $1,116 of goods in ten years. The dollar amount never changes, but its real value erodes. The insurer absorbed the investment risk, yet the annuitant retained the inflation risk — a trade-off the exam contrasts directly with the variable annuity, which exposes the owner to market loss but offers a hedge against inflation through potential growth.
The SPIA timing rule is the other reliable test point. A Single Premium Immediate Annuity is funded with one lump sum and must begin paying within one payment interval — the first monthly check arrives one month after purchase, the first annual check one year after. There is no accumulation phase. Pair this with the funding logic: an immediate annuity is always single premium, and a flexible-premium annuity is always deferred, because flexible deposits need an accumulation phase to land in. A "flexible-premium immediate annuity" cannot exist.
Quick Recap: General Account Safety and the SPIA Timing Rule
To lock the section in, restate the two facts the exam returns to most often. First, a fixed annuity's guarantees come from the general account, so the insurer bears investment risk and the product is not a security — a life license alone suffices to sell it. Second, a Single Premium Immediate Annuity must begin paying within one payment interval, so it is always single-premium and has no accumulation phase. Pairing these eliminates a cluster of common errors, because a "flexible-premium immediate annuity" cannot exist: flexible deposits require an accumulation phase, which only a deferred contract provides.