The two promises are related. Your money in the annuity is tax deferred until you're ready to withdraw. The earnings rate paid on your savings, the amount you save, and the length of time your annuity grows all determine the income you'll receive. For many people, the certainty of a fixed rate of return is a chief attraction of fixed annuities.
Equally important, the rate you're paid is guaranteed by the company issuing the contract, regardless of whether interest rates move up or down.
HOW COMPANIES INVEST
A potential downside of buying a fixed annuity may occur if the issuing company gets into financial difficulties, since its creditors would have a right to assets in the general account. Such situations aren't common, though, in part because the insurance industry is heavily regulated and individual companies are rated regularly.
But be alert: Companies touting fixed annuity returns that are much higher than the rates offered by the competition may be too good to be true. Sometimes, promises of stellar returns are a red flag that annuity money is going into riskier investments such as junk bonds. Before buying, ask to see the rate that the issuing company has paid over the past ten years and be sure to check the company's ratings.
The guarantee is backed by the insurance company issuing the annuity, not the government. But if you buy your contract from a highly rated company, its financial strength and reputation stand behind your contract. Rating services such as Standard & Poor's, Moody's , A.M. Best, and Fitch rank annuity providers on their overall financial condition, which underlies their ability to meet their obligations. These reports are available in public libraries, on the Internet, from your financial adviser, and from the insurance company if you request it.