Are you looking for the best rate on a fixed wage? Shopping around really pays off
If you are looking for a haven for your money, with a fixed annual salary for three years, you can choose one that pays 2.00% per annum or pays 4.25%! Other than the price, the two products are exactly the same.
If you’re shopping for a five-year warranty, the rates available range from 2.60% to 4.65%, according to AnnuityAdvantage’s database of annual premium rates.
Premium rates with the same term vary greatly. If you don’t shop, you’ll almost certainly earn far less interest than you could. Unfortunately, many local pension agents represent only a few annual corporations, and sometimes only one.
Before I offer tips on how to shop, here’s some basic information:
Flat rate deferred annuity (also called multi-year guarantee annuity, or MYGA) is similar to a bank certificate of deposit. It also pays a guaranteed interest rate for a fixed period. Unlike CDs, annuities are tax deferred. Federally-issued annuities are not insured like CDs, but state-mandated guarantee societies offer a level of protection.
While the rate is not the only factor in choosing an annuity, it is the most important thing when other factors are equal. Here are the main considerations.
How long will your money be committed?
The term is the length of the annuity guarantee period. Most multi-year annuities range from 2 to 10 years.
Long-term annuities usually pay more than short-term annuities. But the differences in prices today are not significant. For example, the highest three-year annual salary in our database is now guaranteed 4.25%. In seven years you can get 4.72% and in 10 years 4.75%.
Is it worth restricting your money for a longer period of time for a slight increase in the price? It all depends on your situation and your outlook on future interest rates. One solution is to put part of your money into a three-year annual salary, for example, and part into a five-, seven- or 10-year contract. This is sometimes referred to as the annuity ladder.
How much can you afford while the policy is in place?
When the term expires, you will have the option to recover your principal plus all interest accrued if you reinvest the interest. You can then take the proceeds in cash and pay taxes on the accrued interest (assuming it’s a non-qualifying annual salary). However, you can continue to defer all taxes by transferring the money to a new annual salary at the same insurance company or transferring it to a different insurance company via a 1035 exchange.
What if you want or need some or all of your money Before Term ends? If so some Of your money, you may not have a problem, because most pensions allow partial withdrawals without penalty. Many allow you to withdraw up to 10% of the contract value annually, without penalty. However, some annuities do not have this provision, and in turn, you may pay a higher rate than an annuity that provides more liquidity.
If you get more than the contract allows during the penalty period, the insurance company will impose a fine. These surrender fees and how they are applied vary greatly from company to company. However, they often start from 7% to 10% of the overdraft amount during the first year and decrease annually.
Some pensions allow you to surrender without penalty if you become completely disabled, have been diagnosed with a terminal illness or have been admitted to a nursing home for an extended period of time.
Understand the financial strength of life insurance companies
Life insurance companies that issue annuities are rated by AM Best in terms of financial strength and ability to pay claims. Letter grades range from F to A++.
Sometimes an insurance company with a lower rating may pay a higher price. For example, in the examples at the beginning of this article, an insurance company rated A- pays the lowest rate, and a company rated B++ pays the highest. But sometimes the higher rated carrier will pay more or the same amount as the lower rated carrier.
It is somewhat a matter of personal comfort. Some people only feel comfortable with insurance companies that get at least an A or an A rating. Others may feel comfortable with lower-rated carriers. I recommend choosing companies rated B++ as a minimum and avoiding companies rated B+ or lower.
Less well-known (but top-tier) insurance companies often (but not always) pay higher rates than the largest brand name companies with expensive and expensive advertising campaigns.
How to shop for the best deal
If you go to a local financial advisor or independent agent, they will likely show you products from at most a few insurance companies, maybe just one. You usually only see the annual product(s) they used to offer and want you to buy.
If you work with a bank or broker-dealer, the product selection is usually smaller. Their agents can sell only a limited number of annuity products that the bank or brokerage broker makes available to them.
In other words, buying an annual salary from a personal local salesperson greatly reduces your odds of getting the best interest rate.
Online shopping allows you to compare pensions from dozens of insurance companies and make apples-to-apples comparisons on rates and other features. There are many reputable websites in addition to my company, AnnuityAdvantage.
By using a price comparison site, you can easily avoid bad deals and secure the best price from a sound insurance company. However, there are a few words of warning. Just because an annual agent has a website doesn’t mean they have the experience or willingness to do business in all states. Find a site where the agency is licensed in all states and represents a large number of insurance companies.
Once you’ve looked at the prices and made some initial comparisons, you can talk to an agent, clarify your goals and see how the products available will meet your needs. Also ask about ongoing service after purchasing the installments. Long-term relationships are important.
Your services should not end with an annuity sale. A good agent should conduct annual reviews; inform customers of any changes in AM Best ratings with the issuing insurance company; Assist with beneficiary changes, death claims, and annual acknowledgment if desired; and consult with the client prior to the end of the initial warranty period regarding renewal opportunities with the current insurance company or the best rates with other companies. And you should be able to reach a person directly on the phone any time you call with questions.
Retirement income expert Ken Noss is the founder and CEO of AnnuityAdvantage, a leading online provider of indexed, fixed-income annuities and instant income. Interest rates from dozens of insurance companies are constantly updated on their website. The AnnuityAdvantage website was launched in 1999 to help people looking for the best options in capital-protected annuities. More information is available from Medford, Oregon, located at https://www.annuityadvantage.com or (800) 239-0356.