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.

Most people are have heard of annuities. The general theme is that you make your contribution to an insurance company, and begin to receive monthly payments when you retire. How and when you make the contributions, and when you begin to receive your monthly payments determine if you have an immediate annuity or a deferred annuity.

Similarities between Immediate and Deferred Annuities

In an immediate annuity contract, you start to receive payments out as soon as you buy or fund the contract. In a deferred annuity you buy or fund the contract, and begin to receive payments at some point in the future, which could be one year or many years.

The intent of all annuity contracts is for you to deposit money with the insurance contract, have the money accumulate on a tax deferred basis, and receive periodic payments at some point. While your money is on deposit with the insurance company, you will not be taxed on the earnings each year as you would if your money was in a bank savings account. The earnings will be taxed when you receive each periodic payment or make an early withdrawal.

In addition, the insurance company guarantees your principal and interest (unless you have a variable annuity contract), as well as the payment of the periodic payments. These are the great advantage of annuities. Your interest earnings are tax deferred, and you receive an insurance company guarantee of principal, interest, and eventual payments.

Both immediate and deferred annuities can be designed as variable annuity contracts. In a variable contract, your balance accumulation and payments you receive are tied to the performance of stocks and bonds, or a combination of the two. This gives you more potential for larger, or smaller, increase in your investment and annuity payments than just the interest rate credited by the insurance company. The downside is that the insurance company does not guarantee principal and interest.

Deferred Annuities

A deferred annuity can be a good way to save if you have over 10 years before you will retire and begin to receive payments. You can start the contract without having to make a large contribution immediately. These contracts are designed for you to make a monthly or periodic contribution to the insurance company, and then receive payments when you retire. These tax deferred contracts are especially good if you are already making the maximum contributions under a 401k or IRA plan. Your contributions to a deferred annuity do not come under the maximum contribution rules found in a 401k or IRA, unless you are actually using the contract to fund your IRA or 401k.

A deferred annuity contract can also be purchased with a lump sum contribution. If you suddenly come into a large amount of money, such as inheritance or work bonus, putting this money in a deferred annuity can be advantageous if you do not need the money for a number of years.

The tax effects of a deferred annuity are spread out. When you retire and begin to receive monthly payments, each payment will consist of partly taxable earnings and partly tax free return of your contributions. Therefore the income tax on your earnings is spread over your entire retired life.

Deferred annuities may not be the right choice if you know that you will need to withdraw money within 10 to 15 years. There are a number of penalties that could apply if you take money out before retirement. Withdrawals prior to age 59 ½ will taxable as ordinary earnings, and you may receive a 10% penalty by the IRS. In addition, these early withdrawals will be considered as first coming out as all taxable earnings, and then your tax free contributions, unless you receive periodic payments for a long period of time. Essentially, if you take money out before age 59 ½, the entire payment might be considered taxable, and you may have to pay an additional 10% penalty. It gets worse. If you take money out within the first 7 years of the contract, the insurance company may impose a withdrawal or surrender penalty. This penalty goes down with each year the contract is in effect.

As you can see, deferred annuities should not to be used as a short term savings program or emergency cash fund.

Immediate Annuities

An immediate annuity will start to make payments to you within a month or two after you purchase the contract. You put in the entire purchase price of the annuity in a lump sum and begin to receive payments immediately. These payments can be made under one of the many payout options offered by the insurance company.

These annuity contracts are designed for investors who have accumulated their assets under another investment program, such as a mutual fund or brokerage account. At retirement, you would then transfer your mutual fund or brokerage balances in cash to the insurance company to buy the immediate annuity and commence receiving annuity payments.

The monthly payments you receive under an immediate annuity receive the same tax treatment as a deferred annuity at retirement. Each payment will be received partly as tax free earnings and partly as return of your tax free contributions.

There are several advantages to buying an immediate annuity. You receive guaranteed payments from the insurance company. Interest earned on your contributions is tax deferred during retirement with only a portion of each payment being taxed. You have complete freedom to accumulate your assets prior to retirement in whatever investment program you want, and not be subject to insurance company penalties on early withdrawals.

Be Sure of Your Purpose Before You Leap

Annuities are appropriate for long term savings and guaranteed retirement payments. Either a deferred annuity or immediate annuity fulfills this goal. If you are looking for a short term savings program or plan on withdrawing funds before retirement, you need to really understand the various penalties involved. In many cases, these penalties outweigh the benefits of using a tax deferred annuity.

You also need to analyze the annual expenses charged in annuity contracts.  These expenses can be higher than in other forms of investments. Your insurance agent will also receive a commission on the sale of the annuity contract. Contract expenses are the primary reason financial advisers may not recommend  an annuity to a particular client.

Again, annuities are not for everyone, especially if you have a short term investment plan. However, for many people with a long term outlook, an annuity may be a good choice in saving for retirement.

You do not have to put all your savings in any one investment or annuity contract. You can use an annuity as only one part of your overall financial plan. Many people keep a portion of their savings in a bank account for emergencies or unforeseen expenses, an investment program in mutual funds for continued growth, such as a 401k, and put a portion of their assets in an annuity contract to receive lifetime monthly payments.

An annuity should be considered by all people looking forward to a safe and enjoyable retirement. You need to understand and compare all of the contract provisions so that you know exactly what you are buying. Once you buy an annuity contract, you will then have the peace of mind that your money will be there when you need it in retirement.