BENEFITS OF FIXED ANNUITIES
Author: Keith Singer | Sunday, Aug 12, 2018
For those looking for conservative growth with higher yields than bank products, fixed annuities can be an attractive option. Fixed annuities are contracts with insurance companies that provide for tax-deferred interest payments that go into the contract owner’s account.
The term of a fixed deferred annuity can vary but it is typically between three and 10 years. Insurance companies will usually pay more interest on longer-term contracts than shorter-term ones. The interest rate can change periodically based on prevailing rates or it can be locked in for the term.
I remember back at the turn of the century, a few clients who purchased a fixed annuity paying 7 percent per year guaranteed for 10 years. At that time, not unlike most times in our history, there were concerns that interest rates could potentially rise in the future.
When you lock in the rate for a decade, there is potential interest rate risk. In other words, if interest rates were to rise, the locked-in rate might start to seem relatively unattractive. In their case, as rates fell, that 7 percent yield kept looking better and better.
Deferred fixed annuities typically pay more interest than CDs of corresponding length. They are pretty simple to understand and fixed-rate products give you the exact amount of interest that you can expect each year right when you sign up. They typically allow a fixed percentage of between 5 and 10 percent per year of free withdrawals without any penalties. There may be surrender charges if you try to take a withdrawal that exceeds the free amount afforded under the contract.
Although fixed deferred annuities are not FDIC-insured, they are guaranteed by the claims paying ability of the issuing insurance company and they also allow for tax-deferred interest. In other words, unlike CDs – in which the interest is realized each year for tax purposes whether the interest is withdrawn or not – the owner of a deferred fixed annuity will not have to pay taxes on the interest unless the interest is withdrawn from the account.