There are a number of different fixed annuity contracts on the market, discerning the correct annuity type for your situation can be rather difficult. One of the best ways to diffuse some of the confusion is by educating yourself to how some of the contracts work. The fixed annuity is not an altogether difficult concept to understand, and as such, shouldn’t be too difficult to dissect.

The fixed annuity is a contract between an investor and an insurance company. The investor agrees to pay the insurance company a set sum of money in return for periodic payments back to the investor. An interest rate, accumulation period, distributions period, and a number of other factors are determined at the creation of the contract.

There are typically two different types of distribution start periods available. In an immediate fixed annuity, the insurance company begins distributions to the designated beneficiary one period after the start date of the contract. Monthly payments begin one month after start date, and yearly payments begin one year from the contract start date. This is the primary distinction between deferred and immediate annuity contract.

The accumulation phase is also significant to the contract. Payments into the account to the insurance company can either be via a lump sum payment at the beginning or through period payments over a period of time. Most immediate annuities are done via lump sum payment.

The interest rate is also an important part of your fixed annuity contract. Fixed rate annuities are designed to function as they sound, with a fixed interest rate. This allows the annuity owner the ability to plan for and anticipate growth, payments, and longevity of the account. Other contract types may have fluctuating interest rate depending on a number of internal as well as external factors. Any such fluctuations will be defined in the terms of the contract.