Legal Definitions - fixed annuity

A fixed annuity is a type of insurance contract designed to provide a guaranteed stream of income, typically during retirement. With a fixed annuity, the insurance company promises to pay the policyholder a specific, predetermined amount at regular intervals (e.g., monthly, annually) for a set period or for life. This payment amount remains constant and does not change, regardless of how the insurance company's underlying investments perform. The insurer takes on the investment risk, ensuring the policyholder receives their guaranteed payments.

Here are some examples illustrating how a fixed annuity works:

• Retirement Income Planning: Sarah, a 60-year-old, is planning for retirement and wants a predictable income stream to cover her essential living expenses. She invests a portion of her savings into a fixed annuity.
  This illustrates a fixed annuity because the insurance company guarantees Sarah a specific, unchanging monthly payment for the rest of her life, providing her with financial certainty regardless of stock market fluctuations.
• Securing a Child's Future: A parent wants to ensure their child, who has special needs, receives a steady income after the parent's passing, rather than a large lump sum. The parent purchases a fixed annuity, naming the child as the beneficiary.
  This demonstrates a fixed annuity as the child will receive a guaranteed, consistent payment amount each month for a specified number of years, offering long-term financial stability that is not tied to investment performance.
• Managing a Large Settlement: Mark receives a substantial legal settlement and wants to ensure the money lasts and provides a reliable income. He uses a portion of the settlement to purchase a fixed annuity.
  This example shows a fixed annuity in action because Mark will receive a predetermined annual payment for a set duration, allowing him to budget confidently without worrying about the volatility or performance of the underlying investments managed by the insurance company.