Low liquidity, low return, high security: Fixed annuities thrive in recession

Posted Jul 20th 2009 1:00PM by Bruce Watson

Anyone looking to document the effect of investor fear in the age of the "Great Recession" need look no further than the recent explosion in fixed annuities. Reflecting growth in other fear-based investments like gold and treasury bonds, sales of the secure, conservative annuities jumped by 74% in the first three months of 2009.

Fixed annuities are a contract with an insurance company, wherein a customer gives the company a lump sum and receives a set interest rate for a period of time. Generally, participants have to keep their money in the annuity for seven to ten years, or have to pay a surrender fee when they withdraw it. Some annuities allow users to withdraw a certain amount for free each year.

The benefit of fixed annuities lies in their security. Currently, annuity holders can lock in a guaranteed return of 3.3% to 3.5% for five years. While far from the impressive returns of previous years, this is vastly superior to the 23% of value that the S&P 500 has lost over the past decade.

The return on annuities is significantly better than the current average five-year CD rate of 2.13%. Further, given the continuing travails of banks -- 57 have failed this year -- annuities seem like a secure, worry-free investment. Unlike CDs, they aren't covered by federal deposit insurance; rather, they are backed by state guarantee funds.

Fixed annuity sales are currently at $35.6 billion, the highest numbers ever. Ironically, this annuity explosion has come at the least-likely time. With investors desperate to pour their money into the instruments, rates are extremely low. However, they are extremely secure and, at this particular moment, security seems to trump everything.

Tags: annuities, fixed annuity, FixedAnnuity

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Reader Comments (Page 1 of 1)

7-22-2009 @ 10:58AM

Andrew Richardson said...

The annuities fixed are an option for your retirement plans, well… I think that the annuities insurance companies have the best options for you, and if you want to know more about this you should read carefully before of investing.