As investors continue to search for safe and predictable alternatives for their long term retirement dollars, the demand for fixed annuities is surging as is the proliferation of fixed annuity product choices. In today’s uncertain economy, if you are a life insurance company, you want to be able to capture a share of investor funds that are searching for a safe haven from volatility. And, to the consternation of investors, there are dozens of life insurance companies that offer fixed annuities. So, the challenge for investors is how to find the best fixed annuities.
To add to the confusion, fixed annuities are offered through a number of different sources. You are likely to see them offered through your bank or brokerage firm, and you have probably encountered a number of ads from direct annuity sellers on the internet. With all of these sources willing to answer your questions on fixed annuities, it’s like getting your information from a fire hose – it’s much more than you can consume.
The good news is that the fixed annuity market is highly competitive, so, even though there is information overload, when you know what it is you are looking for, and you can pinpoint the right sources, you are likely to find the best fixed annuity product for you. It does require that you do your own homework, however, the time spent there, will save you much more time and frustration later.
What to Look for in the Best Fixed Annuities
The Best Interest Rates
Fixed annuities are purchased as much for their competitive fixed yields as they are their security, and, as with bank CDs, the yields are their primary competitive feature. So, life insurers that want to attract your investment must put forth their best rate. The danger is that some life insurers are willing to “buy” your business by offering above market rates as an enticement only to drop them to below market rates once they have your money. It is important to check the fine print.
Most fixed annuities come with guaranteed rate set for a period of time, say, five years. After five years, the rate will be adjusted based on a formula, or based on prevailing rates at the time. In some cases, it may be better to go with a slightly lower rate if the terms are better for rates in the long run. And, beware of “bonus” rates that tack on an extra half or full percentage point in the first year. While these may be very appealing, it would be important to check the minimum rate guarantee in future years. Also, some of these products load up on expenses, to offset the cost of the bonus rate.
Fixed annuity rates are often tied to a tiered structure that includes the size of the deposit and the length of the rate guarantee period. Essentially, the larger the deposit, and the longer the guarantee period, the higher the rate you can earn. Because the difference in rates between lower tiers and higher tiers can be as much as 1%, it is worthwhile to consider the higher tiered annuities, but it is important to compare them carefully.
Fixed annuities should be considered as long term investments. You should expect to commit your funds for at least a ten to twenty year period of time. But, life happens, and there may be a change in your circumstances that requires emergency access to your annuity. Fixed annuities do allow for an annual withdrawal of funds, free of charge as long as it doesn’t exceed 10% of the accumulation account. If it does, then you will be charged a surrender fee as high as 12% if the withdrawal occurs within the surrender period (typically 5 to 10 years) stated in the annuity contract.
This is a key differentiator among fixed annuity products. Even though most annuity investors understand that annuities are long term commitments, they don’t necessarily like the idea that they could lose a portion of their money to fees if they need to access it. Recognizing that, some annuity providers try to make their products more attractive by lowering their surrender fees and shortening the surrender period.
If you don’t think you will need to access your funds in a five to ten year period, then the surrender fee and the length of the surrender period may not be of concern to you. Otherwise, this is an area that should be compared carefully between annuity products.
Safety and Security
Aside from the tax advantages that fixed annuities offer, the number one reason behind their popularity is the overall peace-of-mind they provide. Fixed annuities are laden with guarantees: minimum interest rate guarantee, return of principle guarantees, and, ultimately, a lifetime income guarantee. That’s a lot of guarantees which should eliminate the need for sleeping pills. It is important to realize, however, that those guarantees are only as good as the financial condition of the life insurer offering them.
While annuities are considered to be among the safest of investment vehicles, the extra measure of security that everyone is looking for can only be provided by the strongest and most stable life insurance companies. With huge number of life insurers offering annuity products, there really isn’t any good reason not to limit your search to the most highly rated companies. Currently, there are 20 companies that have been assigned the highest ratings from three different ratings agencies, and, the chances are, their annuity products are just as competitive as the lower rated companies.
Finding the Best
The internet has made searching, information gathering and comparing too easy not to invest a small amount of time to help you narrow your choices. Annuity websites that aggregate data from all of the top annuity providers can provide you with quick side-by-side comparisons on a number of features, including interest rates, expenses, surrender fees and financial ratings. It is highly recommended that you first develop your list of 10 or 20 life insurers that meet your standards for financial strength and ratings, so that you can streamline your search.
From there, you should be able to narrow your list of the best fixed annuities down to a few. You can purchase your annuity from the direct seller on the website, or through a financial professional. Either way, you will be in control so that you’ll know when you find the best fixed annuity product.