6.2 Fixed and Immediate Annuities

A fixed annuity guarantees both the principal and a minimum rate of interest. The insurer invests premiums in its general account (conservative bonds and mortgages), so the insurer bears the investment risk. Because of these guarantees, a fixed annuity is an insurance product and the producer needs only a life insurance license — no securities (FINRA) registration is required.

The Two Interest Rates

Fixed annuities quote two rates:

The current rate may exceed the guaranteed rate, but it can never fall below it. This floor is the core consumer protection of a fixed annuity.

Classifying by When Income Begins

The single most-tested classification is when the payout starts:

A Single Premium Immediate Annuity (SPIA) is bought with one lump sum and starts paying almost at once — there is no accumulation phase. A retiree with a $200,000 lump sum who wants a check next month buys a SPIA.

Funding Method (a separate axis)

• Single premium — one lump-sum deposit
• Flexible premium — periodic deposits over time (only deferred annuities can be flexible-premium; an immediate annuity must be funded all at once)

Worked Example: SPIA Payment

A 70-year-old deposits $120,000 into a life-only SPIA. The insurer uses an annuity factor of $6.50 of monthly income per $1,000 of premium.

• Premium in thousands: $120,000 / $1,000 = 120 units
• Monthly income: 120 x $6.50 = $780 per month

Because this is a life-only (straight life) option, payments stop at death even if the annuitant dies after one check — there is no refund to a beneficiary. Life-only therefore pays the highest monthly amount of any option, because the insurer keeps the balance of early deaths.

Trap to Watch

A common exam trap states that a fixed annuity "has no risk." It eliminates investment risk but still carries purchasing-power (inflation) risk — fixed dollar payments lose buying power over a long retirement.

Fixed Annuity Features

• Tax-deferred growth during accumulation (deferred fixed annuities only)
• Guaranteed minimum interest protects principal
• Free-look period (state-set, e.g., 10+ days) to return for a refund
• Surrender charges that decline over a schedule and discourage early withdrawal
• Bailout provision (optional rider): lets the owner surrender without charge if the credited rate drops below a stated bailout rate

Fixed annuities suit conservative, risk-averse buyers who prioritize guarantees over growth.

Market-Value-Adjusted and CD-Type Fixed Annuities

Two fixed-annuity variants appear on the exam. A Multi-Year Guarantee Annuity (MYGA), sometimes called a CD-type annuity, locks the current rate for the full surrender term (e.g., 5 years) instead of resetting annually. A Market-Value-Adjusted (MVA) annuity applies a positive or negative adjustment to surrender value based on interest-rate movement since issue — if rates rose, an early surrender value is reduced; if rates fell, it is increased.

Worked Example: Free-Withdrawal Math

A deferred fixed annuity worth $100,000 allows a 10% annual free withdrawal and imposes a 6% surrender charge in the current year. The owner withdraws $15,000.

1. Free portion: 10% x $100,000 = $10,000 (no charge)
2. Excess subject to charge: $15,000 - $10,000 = $5,000
3. Surrender charge: $5,000 x 6% = $300
4. Net to owner: $15,000 - $300 = $14,700

If the owner is under 59 1/2, the IRS adds a 10% penalty on the taxable (gain) portion of the entire $15,000 — separate from the insurer's surrender charge. Keep the insurer charge and the IRS penalty as two distinct deductions.

Immediate Annuity Payout Choices

Even though a SPIA starts paying at once, the buyer still selects a payout option that fixes how long and to whom payments run:

Adding any guarantee lowers the monthly income because the insurer must cover the beneficiary risk. This trade-off — more protection, less income — is a recurring exam theme.

Suitability of Fixed and Immediate Annuities

Fixed and immediate annuities suit conservative buyers who value guaranteed income over growth and liquidity. The chief drawback is inflation risk: a level lifetime payment loses purchasing power, which is why a COLA option or a laddered approach is sometimes recommended. A SPIA is generally unsuitable for someone who may need lump-sum access, because annuitization is irrevocable.

Recap: Fixed Annuity Exam Triggers

Three phrases in a question almost always point to a fixed (not variable) annuity: "guaranteed minimum interest," "principal is protected," and "no securities license required." A fourth phrase, "income starts next month from a single deposit," signals a SPIA. Conversely, "owner chooses subaccounts" or "owner bears investment risk" rules a fixed annuity out. Spotting these trigger phrases lets you classify the product before doing any math, which is how the highest scorers move quickly through the annuity questions.