Analyzing The Intricacies of Fixed Annuities

Written By: Christopher Tyler on December 20, 2009 No Comment

If safety is a big issue and yet you want the best possible return with guarantees, consider a fixed annuity for your next investment, as many others are doing today. People find that there are significant reasons to select a fixed annuity before they choose a CD. Of course, to find the best deal, you have to shop.

Of course, the interest rate is normally the first thing most people check but there’s more differences when you compare fixed annuities than just the interest rate. Interest rate or rate of return is a good place to begin, but you need to look further to find the best fixed annuity for your situation.

Each policy has an initial rate guarantee period. The initial rate is often quite attractive but if it doesn’t have a longer lock-in period, you might be stuck with a product paying low rates. Some companies have an extended initial rate guarantee but offer a first year bonus to make the product more attractive. After the initial year, the rate applied to the subsequent years is often much lower.

There’s another guaranteed rate on the product. It’s the minimum guarantee the company pays no matter what the surrounding interest environment becomes. Even if banks pay percent on CDs, if the minimum guarantee is 2 percent, you’ll never receive an interest rate lower than that 2 percent minimum.

Investigate the minimums if you’re looking for an initial investment. Some companies charge a service charge if you’re under a specific amount. Others simply won’t take your because it’s too small. Not all companies need you to be a Rockefeller to invest with them. Even if you have an adequate sum, you may be concerned about starting a new product and simply want to test the water. Look for the policy minimums when investing smaller amounts.

The ability to add more funds is also important. Many people find that they like the easy carefree annuities, particularly as they age and want less complication in their finances. They often want to add additional funds. The ability to add to a fixed annuity and the minimum additions become important in this case.

Check the surrender charges. Almost every annuity has some form of a surrender charge. While some may be for a very short period and similar to a shorter term CD, they still have one. Sometimes, you’ll find representatives offering a great deal in an annuity, only to find that it locks you in for a lifetime unless you annuitize, take payments.

While most annuities allow the beneficiaries to make the decision how they want the proceeds, those products that only allow them to annuitize or face a stiff penalty give them limited access. If you have children that spend money easily and you want this to last, it’s not a bad idea. However, you can get the same results using a spendthrift beneficiary designation for that child and still give other beneficiaries access to a lump sum settlement.

Even if you never plan to remove money from your annuity, it’s comforting to know you have access before the end of the surrender period. The amount of penalty free withdrawal varies from company to company with some companies offering interest only and others allowing you to take as much as 10 percent per year cumulative if you don’t take it in one year. Most companies offer withdrawal right somewhere between the two extremes.

Be as careful when shopping for an annuity as you are for any other major purchase. Most people don’t buy the first car they see, they get competitive offers, look over all the features and then choose. Do the same thing when you buy an annuity and you’ll buy the best annuity for your situation.

Christopher Tyler discusses of fixed annuities and other investment options for retirement. As the economy has fallen into the worst recession in decades more and more investors are looking for safe options to grow their investment for retirement. Visit our site to learn more about the fixed annuity as a viable investment for retirement.