How to Buy a Fixed Rate Annuity to Get the Best Deal
An annuity can pay more than twice as much as a similar annuity – comparison websites make shopping easy.
If you’re looking for a safe haven for your money, with a three-year fixed rate annuity, you can choose a 2.00% per annum annuity or a 4.25% annuity! Apart from the price, the two products are quite similar.
If you’re looking for a five-year guarantee, available rates range from 2.60% to 4.65%, depending on the AnnuityAdvantage Annuity Rate Database.
Rates on annuities with the same term vary wildly. If you don’t shop around, you will almost certainly earn much less interest than you could. Unfortunately, many local annuity agents only represent a few annuity companies, sometimes just one.
Before offering advice on how to shop, here is some basic information:
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 fixed term. Unlike CDs, annuities are tax-deferred. Issued by insurance companies, annuities are not federally insured like CDs, but state-mandated guarantee associations provide a level of protection.
Although the rate is not the only factor in choosing an annuity, it is the most important thing when other factors are equal. Here are the main considerations.
How long will your money be committed?
The term is the duration 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 spreads are not significant. For example, the highest three-year pension in our database now guarantees 4.25%. At seven years, you can get up to 4.72% and at 10 years, 4.75%.
Is it worth tying up your money longer for a slight rate hike? It all depends on your situation and your view 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 ten-year contract. This is sometimes called an annuity scale.
How much can you withdraw while the policy is in force?
At the end of the term, you will have the option of getting your principal back plus any accrued interest if you have reinvested the interest. You can then take the proceeds in cash and pay taxes on the accrued interest (assuming it’s a non-qualified annuity). However, you can continue to defer all taxes by transferring the money to a new annuity with the same insurer or by transferring it to another insurer through a 1035 exchange.
What to do if you want or need some or all of your money before the term ends? If it’s 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 each year, without penalty. However, some annuities do not have this provision and, in return, 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 levy a penalty. These redemption fees, and how they are applied, differ significantly from company to company. However, they often start at 7% to 10% of the excess withdrawal amount in the first year and decrease each year.
Some annuities allow you to redeem without penalty if you become totally disabled, are diagnosed with a terminal illness, or are admitted to a nursing home for an extended period during the term.
Understanding 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++.
A lower-rated insurer 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 company with a higher rating will pay more or the same price as a lower rated carrier.
It’s a matter of personal comfort to some extent. Some people only feel comfortable with insurers that get at least an A or A- rating. Others may feel comfortable with lower rated carriers. I recommend choosing at least companies rated B++ and avoiding those rated B+ or less.
Lesser-known (but top-notch) insurers often (but not always) pay higher rates than larger, branded companies with more expensive and expensive advertising campaigns.
How to shop for the best deal
If you talk to a local financial adviser or independent agent, they will probably show you the products of at most a few insurers, perhaps just one. You usually only see the annuity product(s) that he usually presents and wants you to buy.
If you work with a bank or broker, the product selection will usually be even more limited. Their agents can only sell 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 greatly reduces the chances of getting the best interest rate.
Shopping online lets you compare annuities from dozens of insurers and make apples-to-apples comparisons on 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. There are, however, a few words of caution. Just because a annuity agent has a website doesn’t mean they are experienced or equipped to do business in all states. Look for a site where the agency is licensed in all states and represents a large number of insurance companies.
Once you’ve reviewed rates and made some initial comparisons, you can speak to an agent, articulate your goals, and see how the available products meet your needs. Also ask about continued service after purchasing the annuity. Long-term relationships matter.
Your services don’t have to end with the sale of the annuity. A good agent should do annual reviews; inform customers of any change in AM Best rating with the issuing insurance company; assist with beneficiary changes, death claims and annuity if desired; and consult with the customer prior to the end of the initial warranty period regarding renewal opportunities with the current insurance company or better rates with other companies. And you should be able to reach a live person on the phone whenever you call with questions.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed rate, indexed and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356. There are no fees or charges for the company’s services; 100% of the client’s money goes to work for him in his annuity.