What Is A Cd Fixed Annuity?

By Author: Ryan O'Donnell
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A CD Fixed Annuity is a simple type of investment. CD refers to the term Certificate of Deposit which is similar to the savings mechanisms offered by most banking institutions. Typically, your investment will run over a fixed period of time. This can range from 3 to 10 years. For the entire length of the contract period, you will be guaranteed a fixed rate of return. So if you have an interest rate of 4.5% on an investment of $100 000, you will be guaranteed to earn $4,500 in interest from the investment each year.

What are the Benefits of a CD Fixed Annuity?
One benefit is the simplicity of the investment. You know for certain exactly how much you will earn from it each year. It is viewed as a relatively secure investment, and some companies even offer premium guarantees. A premium guarantee ensures that in the event that you have to cancel the policy after just one year, you may forfeit some of the interest earned but you will never get back less than what you originally deposited.

Another benefit is the easy access that you have to your invested funds. You can withdraw the interest amount on a monthly ...
... basis or at any time during the investment. If you need money to pay for an unforeseen medical bill or something similar, you can draw on the interest of your investment. While it is nice to have access to the funds, you must keep in mind that by leaving the investment you will benefit more as you will be earning compound interest as your investment grows. It's therefore not advisable to withdraw funds unless they are needed.

Should you become terminally ill, be placed in a frail care facility or pass away, there is also a waiver of policy surrender charges on most CD Fixed Annuities. This means that you, your family or your beneficiaries can access 100 percent of the investment straight away without having to pay surrender penalties or forfeit part of the investment.

The third benefit of a CD Fixed Annuity is tax deferral. As long as the funds stay within the investment, you will not pay taxes on them. Taxes are only charges when you withdraw interest from the annuity or when it matures and pays you out.

How Does a CD Fixed Annuity Compare to Other Annuity Investments?
A CD Fixed Annuity is one of the more conservative investment options. It generally offers lower interest and returns but a greater level of security. A Traditional Fixed Annuity is a similar type of investment with the main difference being that the interest percentage is only fixed for a period of 3 years, for example. Thereafter, the interest rate is adjusted in accordance with current interest rates with a floor minimum of around 3 percent for the balance of the contract period. If the market is doing well you could earn much more than that in the first 3 years but the converse can also be true if the market is down. An Index Annuity is linked to a financial index and therefore slightly more risky. Returns can be much higher if the market is buoyant but losses on the market will have a greater effect on your investment. A CD Fixed Annuity with a fixed interest rate is therefore seen as one of the more secure investment options.

Who Would Invest in a CD Fixed Annuity?
Because of the nature of the investment, a CD Fixed Annuity will suit a more conservative investor. For example, a retiree that has a lump sum to invest and wants to ensure that their investment appreciates, even if the growth is slow. They can then withdraw the interest on a monthly basis and boost their monthly pension income in this way. The premium guarantee clause offered by some companies and the advantage that your investment can pass to your beneficiaries without probate or penalties will also benefit a more elderly person. Often elderly people have health concerns and sometimes there is a gap that the medical health plan does not cover. The accessibility of the funds in a CD Fixed Annuity means that you can make a withdrawal on your investment to pay for these medical expenses should the need arise.

The accessibility of the investment will also suit someone that is looking to defer taxes but who still wants a level of liquidity. This means that if another investment opportunity comes up that they deem to be beneficial, they can withdraw the interest on the CD Fixed Annuity and place it in the other investment.
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