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Insurance companies that offer annuities maintain a general account, and the customer's payment is deposited into this account when he or she purchases a fixed annuity. The insurance company is then obligated to guarantee the customer a fixed rate of return once payments begin. Fixed annuities usually provide monthly payments and often offer rates equal to or greater than CDs. Because the rate is guaranteed, the insurance company takes on all the risk for the investment and, because the investor is not at risk, fixed annuities are not considered securities. An insurance salesman does not need a securities registration to sell fixed annuities.
There is a significant risk to the purchaser that may not be immediately obivious: depreciation, otherwise known as "purchasing power risk." For example, someone purchases a fixed annuity in 1975, defers for twenty years, and then begins receiving monthly payments of $2,000 in 1995. A decade later, inflation has reduced the purchasing power of this payment by a third, and what seemed sufficient when payments began is now no longer enough to live on.
Purchasers of fixed annuities may choose either immediate annuitization or deferred annuitization.
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