Definition
A fixed annuity is an insurance contract under which the insurer guarantees the principal and a specified or formula-determined interest crediting rate, with values not subject to direct market fluctuation, structured either as an accumulation arrangement (deferred fixed annuity) or as an income arrangement (immediate fixed annuity).
Why it matters
The fixed annuity is the foundational category of insurance-industry savings and income products. It includes deferred fixed annuities (where the contract accumulates value at a guaranteed rate and may later be annuitized), multi-year guaranteed annuities (where the guarantee period is multi-year), fixed indexed annuities (where crediting is linked to an index but principal is protected), and immediate fixed annuities (where income commences shortly after purchase). Naming the category captures the structural commonality — principal protection, insurer-guaranteed crediting, general-account backing — across products that are otherwise quite different.
How it works
A fixed annuity is supported by the insurer's general account assets. The carrier guarantees the principal — the contract value will not decline due to market movement in the assets the carrier holds — and credits interest under a contractually specified rule. The crediting rule varies by product subtype: a traditional deferred fixed annuity credits a renewal rate set by the carrier, typically guaranteed for one year and then renewed; a MYGA guarantees the crediting rate for a multi-year period; a fixed indexed annuity links crediting to the performance of a market index, subject to caps, participation rates, and spreads that the carrier sets; an immediate fixed annuity converts the premium into an income stream at issue. All fixed annuities are asset-backed claims against the carrier's general account, with the carrier earning its margin through the spread between general account yield and the credited rate or the priced annuity payment. Surrender charge schedules typically apply during a defined period, with free withdrawal provisions allowing limited annual withdrawals without penalty.
In practice
For an individual considering any fixed annuity, the operative questions depend on the subtype. For deferred fixed annuities and MYGAs, the comparison is typically against fixed income alternatives — bond ladders, certificates of deposit, money market funds — and the relevant variables are credited rate, carrier financial strength, and surrender flexibility. For fixed indexed annuities, the comparison is more complex because the crediting structure is parameter-driven and subject to discretionary adjustment. For immediate fixed annuities (SPIAs), the comparison is the standard cost-of-income evaluation against the frictionless pool benchmark. A professional should be able to identify which fixed annuity subtype is under consideration and apply the appropriate analytical framework — because conflating subtypes (treating a fixed indexed annuity like a deferred fixed annuity, or a MYGA like a SPIA) produces evaluation errors. Plan fiduciaries should require explicit subtype characterization and the analytical framework appropriate to that subtype.
In the Longevity Standard Framework
The fixed annuity category encompasses arrangements with materially different claim profiles, which is why a single structured claim profile does not apply at the category level. Within the four-claim-property framework, fixed annuity subtypes characterize as follows: a SPIA (immediate fixed annuity) profile is risk sharing — transferred, adjustment mechanism — fixed-contractual, liquidity — none, cost structure — embedded spread; a deferred fixed annuity or MYGA during the accumulation phase is risk sharing — none, adjustment mechanism — fixed-contractual (during guarantee period) or discretionary (at renewal), liquidity — conditional, cost structure — embedded spread; a fixed indexed annuity is risk sharing — transferred (when income riders are elected) or none (during pure accumulation), adjustment mechanism — discretionary, liquidity — conditional, cost structure — crediting parameter drag. The cost-of-income framework applies to each subtype according to its own claim profile rather than to the fixed annuity category as a whole.
Related terms
- Multi-year guaranteed annuity (MYGA)
- Fixed indexed annuity (FIA)
- Single premium immediate annuity (SPIA)
- Deferred annuity
- General account
- Embedded spread
- Surrender charge
- Variable annuity