If you’re looking for a haven for your money, with a three-year fixed-rate annuity, you can choose one that pays 2.00% per year or one that pays 4.25%! Aside from the fee, the two products are quite similar.
If you’re looking for a five-year guarantee, available rates range from 2.60% to 4.65%, based on AnnuityAdvantage’s annuity rate database.
Annuity rates with the same term vary greatly. If you don’t shop around, you’ll almost certainly earn much less interest than you could. Unfortunately, many local annuity agents represent only a few annuity companies, sometimes just one.
Before offering tips on how to shop around, here’s some background:
A fixed-rate deferred annuity (also called a multi-year guaranteed annuity, or MYGA) is similar to a bank certificate of deposit. It also pays a guaranteed interest rate for a specified term. Unlike CDs, annuities are tax deferred. Issued by insurance companies, annuities are not federally insured like CDs, but state-mandated guaranty associations offer a level of protection.
While rate is not the only factor in choosing an annuity, it is the most important when all other factors are equal. These are the key considerations.
How long will your money be committed?
The term is the length of the guarantee period of the annuity. Most multi-year annuities range from two to 10 years.
Long-term annuities generally pay more than short-term annuities. But today, the rate differences are not great. For example, the leading three-year annuity in our database now guarantees 4.25%. At seven years it can reach 4.72% and at 10 years 4.75%.
Is it worth tying up your money longer for a slight increase in the rate? It all depends on your situation and vision of future interest rates. One solution is to put some of your money into a three-year annuity, for example, and some into a five-, seven-, or 10-year contract. This is sometimes known as a ladder annuity.
How much can be withdrawn while the policy is in force?
At the end of the term, you will have the option to recover your principal plus all of your accrued interest if you have reinvested the interest. You can then take the cash proceeds and pay taxes on the accrued interest (assuming it’s a non-qualified annuity). However, you can continue to defer all taxes by rolling the money over to a new annuity in the same insurer or rolling it over to a different insurer through a 1035 exchange.
What if you want or need some or all of your money back? prior to the term expires? Yes it is some of your money, you may not have a problem, since most annuities allow partial withdrawals without penalty. Many allow you to withdraw up to 10% of the contract value annually, without penalty. However, some annuities do not have that provision, and in exchange may pay a higher rate than a comparable annuity that offers more liquidity.
If you take out more than the contract allows during the penalty period, the insurer will assess a penalty. These ransom charges, and how they are applied, differ greatly from company to company. However, they often start at 7% to 10% of the excess withdrawal amount in the first year and decrease annually.
Some annuities allow you to resign without penalty if you become totally disabled, diagnosed with a terminal illness, or admitted to a nursing home for an extended period of time during the term.
Understand the financial strength of life insurers
Life insurers that issue annuities are rated by AM Best for their financial strength and ability to pay claims. Letter grades range from F to A++.
An insurer with a lower rating can sometimes pay a higher rate. For example, in the examples at the beginning of this article, the insurer rated A- pays the lowest rate, while the one rated B++ pays the highest rate. But sometimes a higher rated company will pay more or the same as a lower rated airline.
It is a matter of personal comfort to some extent. Some people are comfortable only with insurers that get at least an A or A- rating. Others may feel comfortable with lower rated operators. I recommend choosing companies rated B++ as a minimum and avoiding those rated B+ or lower.
Lesser-known (but top-tier) insurers often (but not always) pay higher rates than larger brand-name companies with more overhead and more expensive advertising campaigns.
How to buy the best deal
If you go to a local financial adviser or independent agent, they will likely show you products from at most a few insurers, maybe just one. He or she usually only sees the annuity products that he or she is used to presenting and wants you to buy.
If you’re working with a bank or broker, the product selection will usually be even smaller. Your agents can sell only the limited number of annuity products that the bank or broker makes available to them.
In other words, buying an annuity from a local seller in person dramatically reduces your chances of getting the best interest rate.
Shopping online allows you to compare annuities from dozens of insurers and compare rates and other features. There are several reputable sites in addition to my company, AnnuityAdvantage.
With a rate comparison site, you can easily avoid bad deals and get the best rate from a solid insurer. However, there are a few words of caution. Just because an annuity agent has a website does not mean that they are experienced or equipped to do business in every state. Find a site where the agency is licensed in every state and represents a large number of insurance companies.
Once you’ve looked at rates and made some initial comparisons, you can talk to an agent, articulate your goals, and see how the available products fit your needs. Also ask about continued service after you’ve purchased the annuity. Long-term relationships matter.
Your services must not end with the sale of the annuity. A good agent should do annual reviews; inform customers of any changes in AM Best’s ratings with the issuing insurance company; assist with beneficiary changes, death claims, and annuity if desired; and consulting with the customer prior to the end of the initial warranty period regarding renewal opportunities with the current carrier or better rates with other carriers. And you should be able to reach a live person on the phone every time you call with questions.
CEO / Founder, Annuity Advantage
Retirement income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed rate, fixed index and immediate income annuities. The interest rates of dozens of insurers are constantly updated on his website. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon-based company at https://www.annuityadvantage.com or (800) 239-0356.