What Your Insurance Company Does Not Want You to Know about Fixed Annuities

One of the greatest features of fixed annuities is that they are reasonably simple. So, in reality, fixed annuity rates are not nearly as complex as variable annuities are. However, be aware that your financial advisor most likely won’t inform you that they are less expensive, because he will end up making less money. Normally with a fixed annuity you make one single payment for the total amount due to the life insurance company you selected. They take into account various factors like: the total amount of the premium you are paying, your medical history, your gender, age, and the prevailing interest rates in the current economy, along with the most up to date yields of the premium fixed income investments they are supposed to be utilizing to support your annuity. It seems a bit cold to make calculations based upon people’s ages and medical histories, but that’s reality. Based upon their own voluminous documentations of people’s dates of death and dates of birth and their own specific actuarial formulas, they can calculate how much longer you have to live – on average for somebody your age (clearly they can’t predict the exact day you will die on). The rest is simple arithmetic. They determine how much money they can comfortably afford to pay you per month passed on the return rate they can attain from investing your funds and paying a portion of it to you every month. And don’t forget that there is always a profit margin added in for the business and for the advisers and agents selling the annuities. Now, that average time left to pass away is, thankfully, just an average. What this means is that you have a 50/50 chance of dying before that time comes. Sorry, you lose. Unfortunately you lose financially, because you did not succeed in collecting your “fair” portion of the annuity pool and, naturally, you lose by passing away. But the odds, however, are also 50/50 that you will live far past that average. Well lucky you. You will continue to receive those monthly payments and, of course, you won’t be six feet under. This might seem a little unfair but it is true of other things. A large number of individuals pay money into Social Security through taxes but are never able to collect on it because they die, return to their native homeland, become incarcerated, etc. The one spoiler is inflation. Fixed annuity payment remain constant year after year. But the U.S. dollars buying power does not remain stable. It has been falling since around 1945, after World War II ended. Occasionally that decline is drastic, as it was in the early 70’s. Other times it drops a lot lower (as it currently is). It has fallen – when compared to other currencies in the world – a lot in the last few years. However, the overall cost of living within the U.S., according to the United States government which calculates the Consumer Price Index (or CPI), is currently very low. So low in fact that in 2010 recipients of Social Security didn’t even receive a cost of living increase, which was the first time this happened since COLAs were originally set by law. As previously mentioned, fixed annuity rates are quite simple, and with that in mind you should seek out two important things when shopping around: the most financially stable and solid life insurance business and the one that has the fewest expenses – which is providing you with the most competitive offer. But don’t forgo security to save a couple extra dollars. If the company goes belly-up you'll get nothing.