Trying to get the best fixed annuity can be a daunting process since there are so many products advertised. The hard part is deciding the most important factors that go into the pricing of a fixed annuity. For instance, do you simply want the highest interest rate which, in turn produces the largest monthly payment? If so, then it is easy to find a local broker and get a fixed annuity quote. However, this focusing on only the largest payment means that you do not care about surrender charges if you have to withdraw additional money. It also means you don’t care that you have never heard of, nor know the strength of, the insurance company offering the highest rates. In buying a fixed annuity contract, you are making a significant long term financial commitment. You need to consider each of the major factors involved in the pricing of these annuities to determine the best package for your financial situation.
We will first look at the factors you need to review and then put it all together.
Length and Size of Contract
Insurance companies will offer higher rates for long term fixed annuity contracts with large contributions. You will find this same principle when you shop for a CD at your local bank. The longer the period and the higher the investment amount, then the higher the interest rate the bank will offer. Contract length and size are important if you are shopping for a fixed annuity as an investment, with the intention of withdrawing the entire fund at or before retirement. For the average person seeking long term retirement security, it is assumed that the contract period will be long. The size of the contract will be as much as you can afford. Size should not be a major consideration for the average person seeking long term security in retirement.
Too Much Flexibility during Accumulation Period
When you look at the individual contract provisions, your immediate thought will be to ask for more flexibility in each of the options offered. For example, normal withdrawal penalties are charged if you withdraw money during the first seven years of the contract. You may request these penalties to be charged only in the first 5 years of the contract. Another option might be the choosing the highest minimum interest rate guarantee. Getting a higher minimum rate guarantee usually means the insurance company crediting you with a lower actual interest rate later in the contract period. Each of these type options affect the actual interest rates credited by the insurance company. If flexibility is not really needed over the long term, asking for less flexibility in the options will allow the company to credit higher interest rates. A higher interest rate will increase your eventual annuity payments.
Market Interest Rate Environment
Fixed annuity contracts are based on the market interest rate environment at the time you enter the contract. This is logical since the insurance company will theoretically use your contributions to buy certain fixed investments in the market. This is similar to why bank CD interest rates rise and fall with market interest rates. If you enter a fixed annuity contract when rates are high, eventual annuity payments will be higher. If the market rates are relatively low, your eventual monthly payments will be lower.
The problem with interest rates is that nobody knows where market interest rates are going. You may be inclined to delay signing an annuity contract until interest rates increase. However, you might be waiting a long time, and risk losing the benefits of starting a fixed annuity program early in your career. It is better to focus on how a fixed annuity fits into your overall financial plan and not try to wait for the interest rate environment to change.
Which Insurance Company
Since you are making a long term commitment, you want to be sure your insurance company is strong and financially sound. Insurance companies can become insolvent over the years. Even though you would be guaranteed certain payments by the state in which you live, you really don’t want to go through a scenario of the insurance company becoming insolvent. When seeking annuity quotes, you will encounter insurance companies that you have never heard of. Look at A.M. Best, a company which rates insurance companies each year. You want only A or A+ rated companies with names that you recognize. You do not want lose sleep wondering if your insurance company will be in existence 30 years after your buy the contract.
All fixed annuity contracts have withdrawal penalties in the early years of the contract. Some companies may limit these penalties to the first 5 years of the contract. Other companies might extend the penalty period over 7 years. In general, the shorter the period, the lesser the interest rate that will be credited to your contract. In reality, most people never make early withdrawals from an annuity contract. If you select a shorter period just to have withdrawal flexibility, you may be doing yourself a disservice over the long term. You should keep sufficient cash assets outside of the annuity contract to cover emergencies or unforeseen expenses. By doing this, you should not need a shorter withdrawal penalty period and, therefore, will receive a higher interest rate.
Longer Guarantee Period
While all fixed annuity contracts offer some type of interest rate guarantee, the length of the guarantee period will vary greatly. Generally, you want the longest guarantee period you can find. You need to avoid contracts advertising a very high interest rate which is guaranteed for a short period such as one or two years. The interest rates credited in the following years will most probably drop drastically. As with most products we buy, this type of sales promotion will hurt you over the long term.
Shopping for an Entire Fixed Annuity Contract Package
As noted early on, you should not focus only on one factor such as the interest rate, though this is extremely important. You need to balance all factors to produce a sound contract that will be in effect for many years to come. Look for a combination of the highest interest rate credited, longest rate guarantee period, least withdrawal charges, and lowest expenses.
Naturally, you probably won’t find a contract that fulfills all of these goals. Some companies will have the highest rates along with higher expenses than other companies. Others may have liberal withdrawal provisions, but shorter guarantee periods. This is where you need to prioritize based on your own situation. Are you willing to accept a shorter guarantee period, but lower annual expenses? Are you willing to willing to accept harsher withdrawal penalties in exchange for a higher interest rate? The one factor you should not compromise on is the quality of the insurance company. Never choose a lesser rated company to get a higher interest rate. Safety of your retirement assets should always be your first concern.
If you are unsure of some of the provisions, delay signing the contract and keep shopping until you are comfortable with the entire contract. You can call each of the companies yourself or you can search for fixed annuities explained online. Most important is to do research and read a number of articles before you contact an insurance company. You want to be able to tell the insurance agent what you want and your primary goal.
Take your time in researching and searching for the best fixed annuity contract. In the end, you will be confident that the contract fits well into your plan for a long and happy retirement.