Fixed annuities place the investment risk on the insurer. Premiums made to a fixed annuity are invested in the insurance companies’ general account. The company then invests the premiums it receives in a manner that will allow it to credit the rates it has stated it will pay. The interest rate chosen by the insurance company during the first year is meant to be competitive with rates currently offered on other financial vehicles.
One of the major features of a “fixed” annuity is safety. Safety of principal and also safety in that the rate of return is certain. The fixed aspect of the annuity also offers safety in that the annuity holder does not take on responsibility for making any decisions about where or in what amount the funds in his or her annuity should be invested. This is in contrast to a variable annuity in which the annuity holder does take on this type of responsibility.