Strings Insurance Group

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.

Withdrawal Provisions

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.

There are two primary types of annuities: fixed and variable. In a fixed annuity, the insurance company guarantees to credit your account with a minimum amount of interest during the accumulation, or earnings, phase of the contract. The company also guarantees to make periodic payments to you during the payout phase under the payment option you select. There are numerous payout options for you to choose from, such as fixed payments to you for life, payments to you for only a specified period of time, or payments over the combined lives of you and your spouse. Fixed annuities are not securities, and are not regulated by the SEC. Premiums paid in are placed in the insurance company’s general account, which is a commingled fund used to back all guarantees of the insurance company under all insurance and annuity contracts.

In a Variable Annuity, you have control over the investments during the accumulation phase.  You, as contract owner, and not the insurance company, may choose to have your premiums invested in a number of investment options, usually mutual funds. The periodic payments you eventually receive will be fixed, but the calculation of the payments will be dependent upon the investment performance of the funds you selected during the accumulation phase.  Since contract values are totally dependent upon the investment return of selected mutual funds, variable annuities are considered securities and, therefore, regulated by the SEC.

Equity Indexed Annuities – Overview

An equity indexed annuities combines certain aspects of fixed annuities and variable annuities. During the accumulation phase, you receive credited interest based on the performance of the mutual funds selected. The rate of return paid is linked to a financial market index, usually the Standard & Poor’s 500 Composite Stock Price Index (S&P 500). If the index goes up, your account is paid a portion of the gains. If the index goes down, you are protected from suffering significant losses since the principle is guaranteed. The insurance company also promises to credit your account with a minimum guaranteed interest return. During the payout phase, the insurance company will make guaranteed periodic payments under the payout option you select at that time.

Equity indexed annuities are considered to be fixed annuities and are not subject to SEC regulations. This is due to the crediting of a minimum guaranteed interest rate and guarantee of principle by the insurance company.

Contract Details Affecting Earnings

Several factors affect the amount of interest credited to the account each year. Each of these factors needs to be compared and analyzed when shopping for an equity index annuity.

Participation rate – this rate calculates the amount of increase in the linked index that will be paid. If the participation rate is 80%, and the S&P 500 rises 4%, the annuity contract would be credited with 3.2% (.80 times 4%).

Methods of Crediting the Participation Rate

• The Annual Reset or Rachet – This method calculates the annual percentage change in the linked index from the start of the contract year to the end of the contract year. This method locks in your gains each year, which can be beneficial if rates drop at the end of the year.

• The High Water Mark – This method identifies the highest level of the linked index during the year and uses this as the comparison point at the start of the next year. More interest may be credited using this method than other indexing methods, but interest is not credited until the end of the term.

• The Point-to-Point – This method calculates the change in the linked index between account values at the beginning and end of the year. This method may produce more interest if the interest and participation rates are relatively high. However, the high point during the year may end up being lower than other points during the term of the contract.

• Interest Rate Cap – Some equity indexed annuity contracts have a maximum rate that will be credited over a certain period of time. If the maximum interest rate is 8%, and the S&P 500 rises 20%, your contract will be credited with only 8%. On the other hand, some upside potential with no downside risk can be quite beneficial depending upon your investment objectives and risk tolerance level.

Administrative and Management Fees

Some insurance companies will charge administrative and management fees, as percentage of account value. These fees will be deducted from your earnings under the contract. Other companies may have no administrative fees, but higher management fees. It is important to identify what fees are charged and how they will be calculated because these fees are not always easy to spot in the contract.

Benefits of an Equity Indexed Annuity

These annuities are well suited for conservative investors who need some exposure to equity investments, but cannot afford a severe dip in their retirement assets. Older investors nearing their retirement age or high income investors who have surpassed the maximum limits under their retirement plans may be excellent candidates for an equity index annuity.

No Two Contracts are the Same

It would be easy to compare contracts if all insurance companies were mandated to use the same provisions, and only the percentages or numbers could change. Unfortunately, this dream does not exist since the equity index contracts cannot be bought and sold like a share of common stock. The characteristics and factors noted above are the provisions found in all equity index contracts.  However, the provisions might be called by different names and the factors may vary in how the exactly work. Accordingly, you need to thoroughly understand the provisions of each contact and ask many questions of the selling insurance agent. This is a long term investment; one affecting your entire retired life. A bit of reading and questioning now will prevent unexpected results later on.

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