Top Annuity Interest Rates

Although they become complex, sophisticated investment instruments, annuities still run on common sense: longer and later are better.

The longer the insurance company can invest your money before disbursing it, the later in your life you allow the company to keep your money, and the shorter the term of your repayment, the more interest the company will pay.  If you keep your annuity contract fairly simple, you can expect maximum yield for minimum investment.

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Annuity Interest Rates by Type

Fixed lifetime annuities consistently pay the lowest interest rates, because the insurance company guarantees the safety of the principle, the rate of return for the duration of the investment, and the payments’ consistency.  By far the safest annuity, the fixed lifetime annuity doubles as the most conservative. Expect to see rates averaging between 3% and 4%.

Fixed term annuities pay slightly more than their lifetime look-alikes, because they require no hedge against owners out-living their life expectancies.  The later in the client’s life the payments begin and the shorter the term, the more interest the annuities will pay.  Look for rates between 4% and 5%, and pay attention to bonus rates on 10-year annuities, because they consistently rank highest with the least down-side risk.

Immediate single premium lifetime annuities mark the middle ground among annuity investments.  These annuities give the insurance companies more immediate working capital, but the companies still must hedge against the risk of clients outliving their life expectancies, and they must hedge against the fact that some owners collect more than the sum of their principal and interest.  Expect to see interest rates comparable with those for fixed term annuities.

Variable term annuities deliver the highest earnings over the long-term because they tie the owners’ interest rate to individual assets in the stock market; and because equities average a 12-14% return, variable annuities perform similarly. As with all term annuities, the shorter the pay-out term and the later in the owner’s life it begins, the higher the yield.  For five- and seven-year variable term annuities, rates occasionally rise about 10%. More reasonably, you can expect to see rates between 8.5% and 9.5%.

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Caveats and Quid Pro Quos

Because the insurance companies want your money for their investments, some offer “bonus rates” at your annuity’s inception.  Market analysts have seen annuities which guarantee 3% over the life of the investment but yield 12% during the first three years of the annuity’s term.  Analysts quickly point-out that 3% hovers very near the bottom of the annuity interest rates’ scale, so that the bonus rates don’t look nearly so seductive when you look more carefully at the long-term rewards.

Market analysts also see little correlation between insurance company reputations and ratings and the interest they pay on their annuities. They see neither trade-off between security and earnings nor between risk and reward.  In other words, the highest rated, most venerated companies could pay lower interest in exchange for reasonable assurance that they still will be doing business in twenty years; but it’s not automatic. Similarly, analysts seldom see high-risk companies paying the highest rewards. Instead, the insurance companies’ actuarial tables and their own risk tolerance determine their rates of return. The company whose clients routinely live exactly to their life expectancies and whose investments routinely out-perform the markets can afford to offer more generous rewards.

In conclusion, the kind of investment and the length of the payout contribute most to differences among annuity interest rates.

Researching Annuities Online

The internet offers a host of useful tools for comparing and contrasting annuity interest rates, and many of the tools are user-friendly and interactive enough that you can do the majority of your research and investigation online. Still, no matter how internet and market savvy you are, always seek advice and counsel from a trustworthy financial advisor. Just as you always solicit a second opinion before a major surgery, so you always should invite a second opinion before a major investment. Annuities should play part in a bigger picture: your overall retirement plan.

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