3 Year Indexed Annuity

Rates are on the rise and inflation is a concern for nearly everyone, just as it has been for years.  But this time we are seeing rates creep up in everything from CDs and bonds to commercial mortgages.  In addition there has to be more uncertainty surrounding the world economy than I can ever remember.  The Fed is set to keep raising rates but that does not necessarily translate to higher rates on savings.

Over the past few weeks, I have been helping a couple clients replace some annuities that are just coming out of the surrender period.  Each person can move all or part of the money out of the annuity without penalty.  Both people are looking for short-term fixed annuities with a multi-year guaranteed rate.  So I’ve been watching products closely to make sure we get the best deal when the time comes.

The first guy is moving out of another five year fixed rate annuity.  The company that has the money now is not offering a competitive renewal rate so he’s looking for more interest.  He settled on a five year contract with a guaranteed rate of 3% every year.  Before I could get the paperwork to UPS, the new company announced a rate increase to 3.25% so he’ll get even more than he had planned.  I love when it happens that way.

The second guy is coming out of an index annuity he has held for the past seven years.  It was purchased in 2015 when rates were at a previous all-time low.  The annuity replaced bond funds in his portfolio and performance was not great but similar to what the bonds would have done over the same time period.  He used the annuity because it had more liquidity but never tapped the funds because his equities portfolio had such impressive growth.  This money is now pegged to be a safety net and his total plan is in excellent shape.

There is a fair bit more flexibility on the back end of an index annuity than a fixed annuity, but that’s the subject of a different podcast.  In this second example he plans to split the funds, using a portion for a fixed annuity, a little for a Roth conversion and the remainder will stay where it’s at, waiting for a good opportunity.

He has targeted 3 year guaranteed rate annuities for the fixed annuity portion.  I’ve been watching rates for the past few weeks, advising him to be patient and wait for just the right deal.  Well in the past ten days, the top 3 year annuity has changed several times.  Each time we look a new company is on top.  As I prepare this, the current highest rate is 2.85% from New York Life.  Of course I’m talking only about A rated or better companies.  I don’t deal with B rated garbage.

As everything was changing fast I got an announcement from Great American Life, a company I’ve done lots of business with in the past.  This company has a 3 year index annuity that’s been around for a couple of years but the rates were never that great so I’ve stayed away from it.  This time the announcement opened my eyes a little.  The rates looked excellent for a three year deal.

I’ll explain the product itself in more detail on the podcast but I’ll stick with the basics for now.  The fixed rate option in the contract pays a respectable 2% and the annual cap rate on the S&P 500 is 5.5%.  You’d only have to hit the cap rate in two of three years to average more than 3% for the term.  If you hit all three then it would work out remarkably well for a short-term commitment.

This is a good opportunity for anyone hesitant about a commitment to annuities or if you are skeptical about rising interest rates.  Nothing you can lock in today has this type of potential but there are a few downsides.  Longer term contracts have far more options and potential but are more suited to long-term planning objectives.  For certain specific assets this cute little contract makes a lot of sense for money sitting on the sidelines.

Feel free to call or set up an appointment if you’d like to talk about it.


Written By

Bryan Anderson

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