With the proliferation of fixed annuity products on the market, annuity rates have become commoditized, meaning that they are the primary means by which investors select their annuity products. Annuity rates are so competitive that investors are drawn to the annuity with the rate that is two tenths of one percent higher than all of the others, and with that, they are satisfied that they secured the best annuity rate. The problem is that there are so many facets to annuities and their rates that simply evaluating them by the current rate does not necessarily uncover the best annuity rates.
Annuity rates have always been competitive with other fixed yield vehicles such as bank CDs. It’s fairly easy to find a fixed annuity offering a higher rate than a CD. The real competition is among the hundreds of annuity providers all vying for the same investor deposits and their marketing and sales practices have become fierce. It is recommended that, before jumping on the next big rate, investors dig beneath the flashing promotional rate and consider some other key factors that can have a much greater impact on the long term performance of the annuity.
Getting the Best Annuity Rates
Rate Guarantee Period
Most fixed annuities guarantee a rate for a specified period of time. As it is with bank CDs, the longer the rate guarantee period, the higher the rate guarantee. Because annuities are long term investments, it might make sense to consider the longer term rate guarantee in order to get the best rates that are available. It would be important to read the fine print on these rate periods because, in some cases, the rate period doesn’t always equate to the actual guarantee period. On balance, it might make more sense to accept a slightly lower rate that is secured with a guarantee for the whole period.
After a guaranteed rate period ends, the rates are recalculated based on a stated formula and they are subject to change each year going forward. Space doesn’t allow for a more complete explanation of these formulas. Suffice it to say, that it is important to understand how the formula works, whether the formula itself is subject to change and how it compares to other annuity contract formulas. Being lured into a high rate annuity can really sting later when you find out that the extended annuity rate is well below the market.
Minimum Rate Guarantee
Also buried in the fine print is the minimum rate guarantee that provides investors with an out should the current rate ever fall below it. The only real consideration here is how high the rate is as compared to other annuity products. Obviously, the higher the minimum rate guarantee, the better the annuity contract.
Premium Bonus Rate
Annuity providers offer higher rates as an incentive keep you investment with them long term. They also offer rate bonuses of as much as a half a percent to encourage larger deposits. For many annuity products the break point for higher rates starts at $100,000. Some can be found with lower breakpoints of $50,000 or below. A half point rate bonus could be very meaningful on investments of that size so it would be important to consider the advantage of larger deposits.
Early Surrender Fees
As another incentive to encourage a long term investment horizon, most annuity providers incorporate a surrender fee schedule that penalizes withdrawals made in the early years of the annuity contract. The fees can range between 4% and 10% of the withdrawal amount depending on the year it is taken. A typical surrender schedule establishes a high rate in the first year which declines by a point in each subsequent year until it vanishes. Contracts with low surrender fees and/or short surrender schedules can be an appealing offset to a slightly lower initial annuity rate. However, if you don’t anticipate any possibility of taking an early withdrawal, then this might not need to be a consideration in finding the best annuity rates.
The Best of the Best
Annuities have always been considered to be among the safest investments. Their safety, however, is inherent in the financial strength and stability of the life insurance company that issues the contract. In touch economic times it’s possible for a company to face some difficulties in meeting some of the stringent legal reserve and capital surplus requirements imposed upon them by the states. While there has yet to be an annuity contract holder who has ever lost any money, investors would be well –advised to work with the top-rated companies (as measured by A.M. Best and Standard and Poor’s). The more financially strong and stable a company is the more likely they are to be able to maintain competitive rates well into the contract term.
For many people, it’s not difficult to get caught up in the frenzy of high annuity rate promotions. The aggressive practices of some insurers to attract more deposits can be very enticing; however, insurers that offer the highest rates may also do more to protect their profits by offering fewer guarantees and lower extended rates. To truly find the best annuity rates, it is important to look under the hood to see how the engine really works.