What Is A Fixed Term Annuity?

Before delving into the fixed term annuity, it is important to first understand what an annuity is in a more general sense. An annuity contract is a type of agreement commonly made between a life insurance provider and the insured individual, or individuals. In an annuity contract, the insured party pays a single premium to the insurance provider, who will distribute it back in installments over time, either until the death of the insured party or until a specified date. An annuity contract that is paid back until death is called a life annuity. An annuity contract with a specified end date is considered a fixed term annuity. Both are types of immediate annuities, a term that refers to any annuity contract where an insurance provider has agreed to distribute a number of payments in exchange for a set amount of money.

What Are the Benefits of Fixed Term Annuities?

While a life annuity can guarantee a steady payback over the course of the insured party’s life, many investors use fixed term annuities as a means of avoiding income and capital gains taxes, while accumulating money from the insurance payments. American investors find this particularly effective because the return of the principle portion of a payment is not taxed at all by the American government, and the income portion of a payment is subject only to income tax, instead of capital gains tax.

Also called a term certain annuity or a short term annuity, a fixed term annuity allows investors to know in advance the exact number of payments they will receive, and how long the payments will last. Unlike life annuities, fixed term annuities are not usually used to provide a continuous income or to fund retirement, as the insured party could live for years after the payments have ended. Instead, many investors use fixed term annuities to provide money needed in the short term, such as to fund a life insurance premium, or to use in other investments.

Other Types of Annuities

While life annuities and fixed term annuities are the most common types of annuity, there are several variations on the two. A deferred annuity may grow by interest rate alone, or may allow for the inclusion of stock or bond funds. Unlike other types of annuity, tax payments are deferred and will not be collected until the funds are withdrawn. Another type of annuity is the variable annuity, which combines the life insurance qualities of life annuities with the investment qualities of fixed term annuities.