The Key to Buying Fixed Annuities

There are literally hundreds of fixed annuities, of all shapes and sizes, on the market today which complicates the already daunting task of making the right investment choice  for your long term security.  The key to buying fixed annuities is to narrow down the choices quickly so that you can focus on those key issues that impact you and your financial situation the most.

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Annuity Buying Process

The process of buying fixed annuities could be compared to the process of buying automobiles. There are hundreds of different makes and models, but when it comes right down to it, all automobiles are fundamentally the same.  Initially you need to decide between trucks, cars and SUVs, and you may want to decide between gas, diesel and electric. 

If you have decided on buying a fixed annuity, you’ve already  made similar decisions.  You’ve  chosen a fixed annuity over variable, indexed and immediate annuities because it best fits your needs and preferences. From there, you need to decide on a make and model that will provide you with peace-of-mind for your long term retirement savings.

Most car buyers will narrow the field of car makers by studying  Consumer Reports for their track records for building cars that consistently meet the highest standards for safety and durability.  The same process should be employed when narrowing the field of annuity providers.   Rating agencies, such as A.M. Best, provide a detailed analysis of the financial condition and claims paying ability of all life insurance companies.  Companies that meet their highest standards are given an A++ rating.

With your financial security at stake, there is no reason to consider life insurers with less than an A- rating.  The higher your own standard, the more you can narrow the list, so your first approach might be to consider A+ companies or better. You will find a very good selection of product offerings among these top insurers.

Next, you can compare these annuity providers straight across and side-by-side for their core components such as credited rates, rate guarantees,  and withdrawal provisions. Annuity providers have added some innovations, much like a car maker adds bells and whistles, but these core components are like a new car’s gas mileage, service warranties and riding comfort, they are the fundamental determinants for purchase decision.

Here’s how you can narrow the field by comparing the core components.

Credited Rates

At any given time, the spread between the highest rate and the lowest rate of fixed annuities offered by A+ rated annuity providers may be as small as .25%. The real differences in rates occur when choosing between a short term rate guarantee and a longer term guarantee.  The longer the guarantee period, and, the longer your funds are committed to the insurer, the higher the credited rate. For example, the credited rate on a 5-year term annuity is currently 3.15% while the rate for a 1-year term is 1.4%. 

Here’s your dilemma and, perhaps, the basis of your next decision.  While it is tempting to choose the 5-year term for its higher rate, there is a risk that, during that period of time, interest rates could increase.  Where 3.15% seemed pretty attractive at the time, it may be well under prevailing rates in a few years time.

The key to buying any fixed yield investment is to lock in longer terms when interest rates are high and to lock in shorter terms when interest rates are low.  Another approach is to ladder your purchases so that, as interest rates rise, you can capture higher rates with each subsequent purchase.

You can narrow the field by comparing those fixed annuities that offer the best rate for the length of term that best fits your interest rate risk comfort level.

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Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.

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Minimum Rate Guarantees

No matter the term you select, the initial guaranteed rate will be adjusted once the term ends.  At that time the credited rate will be based on the yield experience of the annuity providers underlying investment performance with consideration for the current interest rate environment.  Another determinant, then, is the way that credit rates are established after the guaranteed period has ended. 

It is important to understand the formula for determining future credited rates and it is also important to compare the minimum rate guarantees.  In most cases, the fixed annuity includes a bailout provision that allows the annuity owner to cash out his funds, without penalty, if the current credited rate falls below the minimum rate.

The field can be narrowed further by directly  comparing the credit rate formulas, the minimum rate guarantee and the bailout provision. The higher the rate guarantee and bailout rate, the better.

Withdrawal Provisions

Fixed annuity investors have a long term investment horizon, so withdrawal provisions may not be an important consideration. Early withdrawals are penalized when they exceed 10% of the account value in a given year. For someone who invested $100,000 into a fixed annuity, he could withdraw $10,000 should he have the need. These penalties usually only apply to the early stage of the accumulation period, the first 5 to 10 years.   

If early access to your retirement savings is important to you, you can narrow the field by selecting annuities with more liberal or flexible withdrawal provisions. 

Summary

The key to buying fixed annuities in a highly competitive market is to focus on their core components as a way to narrow the field to a manageable number for comparison.  It is important to remember the primary reasons you chose a fixed annuity as your retirement vehicle  - for its safety, stability, and predictability –  as you carefully weigh the strengths and weaknesses of the fixed annuities in your field.

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