A fixed annuity is a contract that allows you to accumulate earnings at a fixed rate during a build-up period.
You pay the required premium, either in a lump sum or in installments. The insurance company invests its assets, including your premium, so it will be able to pay the rate of return that it has promised to pay.
At a time you select, usually after you turn 59 1/2, you can choose to convert your account value to retirement income.
Among the alternatives is receiving a fixed amount of income in regular payments for your lifetime or the lifetimes of yourself and a joint annuitant. That's called annuitization. Or, you may select some other payout method.
The contract issuer assumes the risk that you could outlive your life expectancy and therefore collect income over a longer period than it anticipated. You take the risk that the insurance company will be able to meet its obligations to pay.
Some variable annuities offer a fixed rate account with a guarantee of principal, such as an interest account.
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