Can You Lose Money in a Fixed Annuity?

A fixed annuity is a contract between an individual and an insurance company, designed to provide a guaranteed income stream, often for retirement. Similar to a certificate of deposit, you pay premiums, and the insurer provides a guaranteed rate of return on your principal. This product protects your initial investment from market fluctuations and ensures predictable growth. Generally, you do not “lose money” with a fixed annuity.

Understanding Principal and Interest Guarantees

Fixed annuities protect your principal from market downturns, meaning its value will not decrease due to stock market volatility. This feature makes fixed annuities a more conservative option compared to investments like variable annuities, where the principal can fluctuate with market performance.

They also provide guaranteed interest rates. The insurer sets a specific rate for your contributions, ensuring predictable growth. This initial rate may be guaranteed for a set period, such as one, three, or five years. After this initial guarantee period, the insurer resets the interest rate at regular intervals, often annually, but the new rate cannot fall below a guaranteed minimum stated in your contract. Multi-year guaranteed annuities (MYGAs) lock in the same interest rate for their entire term, commonly three to ten years.

Factors Impacting Your Total Accessible Value

While fixed annuities protect your principal, certain factors can affect the total amount you can access or the purchasing power of your funds.

Surrender Charges

Surrender charges are fees applied if you withdraw funds from your annuity before the surrender period ends. These charges discourage early withdrawals and allow insurers to invest premiums for the long term. Surrender periods commonly range from three to ten years, with charges typically starting higher (e.g., 7% to 10% in the first year) and gradually declining each subsequent year. Most annuities include a penalty-free withdrawal provision, allowing you to withdraw 5% to 15% of your account value annually.

Fees

Fixed annuities generally have low fees compared to other annuity types, but some charges may still apply. Administrative fees cover the costs of managing the annuity contract, including record-keeping and transaction processing, and typically range from 0.10% to 0.50% annually. Some contracts may also include a Market Value Adjustment (MVA), which can adjust the withdrawal amount up or down based on interest rate changes if funds are withdrawn early.

Inflation

Inflation is another factor that can erode the real value of your annuity over time. While your annuity grows at a guaranteed nominal interest rate, the purchasing power of that money can decrease if the inflation rate exceeds your annuity’s interest rate. This means that even if the dollar amount of your annuity increases, it might buy less in the future due to rising prices of goods and services.

Insurer Financial Strength

The security of a fixed annuity is ultimately backed by the financial strength of the issuing insurance company. While the risk of an insurer becoming insolvent is low, it is a possibility. Independent rating agencies, such as A.M. Best, S&P, and Moody’s, assess the financial stability and claims-paying ability of insurance companies. A higher rating generally indicates a stronger financial position and a greater likelihood that the company can meet its future obligations.

To provide a safety net for policyholders in the event of an insurance company’s failure, state guarantee associations exist in every state. These non-profit organizations are funded by assessments on other solvent insurance companies within the state. If an insurer becomes insolvent, the state guarantee association steps in to cover policyholder claims up to certain limits. While coverage limits vary by state, the typical statutory limit for annuity contracts is $250,000 in present value of benefits per annuitant. It is advisable to research an annuity provider’s financial strength ratings before purchasing a contract.