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Annuity Rates

Determining Annuity Rates is a daunting task….. For advisers who do not listen intently to their clients.

However for advisers who do their job properly, and for their lucky clients, the process is to clearly define the goals, objectives, and timeline, and only then to find the right tool for the job.

Focusing on rates is but a small portion of the equation for optimizing a retirement income portfolio. More important is to analyze the goals, the assets, the needs, and the risks, facing an individual’s retirement plans. Only then is it appropriate to discuses annuity rates.

Become an educated annuity buyer, and know when it’s appropriate to focus on the annuity rate.

Where Are Annuity Rates Emphasized?

Sure, you can find a high appreciation rate…. but is it coupled with a murderous surrender schedule??

Is a big, bold payout rate masking the fine print, where you realize the payout rate is based on an annuity’s income value, and the actual account value has no guarantee whatsoever?

Beware that which sounds too good to be true… it usually is. Focus on what you need… what provides you the best combination of Safety, Security, and Profitability, in that order.

Focusing on annuity rates only is to focus on one leg of a three legged stool.

Using Free Withdrawals In Annuity Contracts

The Free Withdrawal from your annuity is a critical element in your decision process, and any Annuity buyer must carefully consider how they would use free withdrawals, and when.

Every annuity contract contains a clause allowing the free withdrawal of a certain percentage of the initial premium each year without a surrender charge. Individual states have laws that dictate a minimum percentage.

Typically, the amount of free withdrawal is around 10% and some annuities allow for a 15% free withdrawal.  On the flip side, there are products that limit the withdrawal to 5%.

High Quality companies offer more than the state mandated minimum.  Like most of the factors we discuss, this fundamental integrity and respect for customers permeates their contracts and earns your trust and your business.

Conversely, many annuity agents and companies will use bonus rates and higher minimum guaranteed yields to entice you into lower minimum withdrawal allowances. Is this in YOUR best interest?

Remember the Ground Rules ! It should go without saying that the bigger free withdrawals are good for the customer and the smaller ones are good for the insurance company.  Which would you choose?

Action Items:

If liquidity and control of your capital is important, be sure that your free withdrawals are as large as possible
Quality companies are not afraid of you withdrawing your money, and consequently don’t sink to the lowest levels allowed by law for your withdrawal allowance.
Remember, it’s YOUR money.

Bonus Rates

Want to know the ONLY time to consider a Bonus rate in an Annuity Decision? Many products include attractive bonus interest rates.  Some annuities offer bonuses as high as 10% or more just for signing up.

Companies lose money on this from the start!

To pay for this expensive form of marketing, the insurance company will need to guarantee they can hang on to your money for long enough to recoup the cost and turn a profit. If you buy such a product, you are married to a serious surrender schedule with substantial fees.  Say goodbye to your money for a long time. Bonus rates are just a form of flashy packaging for annuity products and should definitely be ignored nearly every time an annuity is evaluated. When they make sense: Once all other contract provisions are equal, a bonus rate can break a tie between two annuities.   Then, and only then, is a bonus a deciding factor.  Regrettably, we have yet to see an annuity where all the other factors are equal. Action Items:

Bonus rates are carrots that pander to the base human emotion of greed.
Set aside greed and examine your true motivations – if you really don’t need liquidity, or don’t mind a long surrender charge, a bonus rate might be worthwhile
In general, avoid bonus rates until the end of a decision making process, once YOU lay out EXACTLY what you want your annuity to do for your financial future.
  

 

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Immediate Annuity Rates

Immediate annuity rates are reflective of the very simple agreement between you and an insurance company. You give the company money and in return they send you a monthly paycheck as long as you live.

Immediate Annuity Quotes vary all the time and reflect current market rates.

There are several ways to structure an immediate annuity contract depending on your specifics but for the purpose of explaining how rates apply to immediate annuities a basic definition will do just fine.

So, how are the payments calculated? That’s also very simple as there are just two immediate annuity rates that are factored into the equation, and one of them really isn’t a rate.

First of all the discount rate is used to figure out principle and interest payments over your life expectancy.

Second, mortality credits enhance the yield on each payment and ensure that income payments continue if you live longer than expected.

Let’s take each of those points apart individually for a clear example of how immediate annuity rates work.

Discount Rate- This is the current rate of interest insurance companies credit toward the payments of an immediate annuity contract. Payments consist of principle and interest paid over the life expectancy of the contract owner. For example, mortality tables tell us that the average 65 year old male will live another 17 years. Assuming a 4% discount rate and initial investment of $100,000 monthly income payments would equal roughly $673. According to this formula the account would be depleted at age 82. But payments continue for life, right? That’s where mortality credits come into play.

Mortality Credits- This takes into account the fact that although a 65 year old male has a 17 year life expectancy, not everyone will live that long. Some will die before 17 years and some will live longer. Upon death, remainder balances are surrendered to the insurance company and supplement the contracts of those still living. This gives the company the ability to continue payments for the life of all individuals, although in theory, those who live longer than expected don’t have any money left in their account. Those who happen to live longer than expected will see enhanced performance due to mortality credits. This is the perfect hedge against longevity risk, or the uncertainty of life expectancy.

Hopefully my long explanations didn’t make the simplicity more complicated than it needs to be. You just need to have an understanding of all the working parts. With immediate annuities there are only two. Insurance companies have this calculation pegged since this is the traditional form of annuity that has been in existence for several centuries.

Over time, actuaries have made the calculation of life expectancy and mortality rates a literal science. That’s not something you need to worry about since the company will take care of that for you. The discount rate is a very straightforward calculation but mortality credits may have left you wanting more. Well, there’s a lot more I could say so I’ll go ahead and say it. Check out this page for a deeper explanation of how mortality credits protect and enhance your profit potential.

More On Immediate Annuity Rates:

For more information on immediate annuities don’t hesitate to call or email with questions. Immediate Annuity Quotes vary all the time and reflect current market rates, so get an updated quote.  Also, be sure to sign up for The Annuity Report to get more details as to how you can find the most beneficial immediate annuity rates and structure a contract to meet your needs.

Fixed Annuity Rates

Fixed annuity rates are probably the easiest among all the types of annuity contracts to understand. You deposit money with an insurance company and commit to leaving it there for a certain time period. When that time period has passed, your money will be returned plus interest. There are, of course, other important details but we’re talking about annuity rates so let’s stay on point.

As simple as fixed annuities seem, there are a wide variety of rates that can be applied to each contract. Each type of rate is listed below with an explanation of how it affects a fixed annuity contract.

Fixed Annuity Rates Components:

Multi-Year Guaranteed Rate- This is a type of annuity contract all its own that is often referred to as a CD-type annuity. That’s simply because the contract comes with a declared rate that is guaranteed never to change over the time period.

Current Rate-Other fixed annuity contracts offer a current rate of interest that is good for a portion of the overall time period. Usually that’s one year, at which time a new current rate is declared for the next year.

Renewal Rate- This the rate declared on each contract anniversary that will be applied to existing contracts where multi-year guarantees are not applicable.

Guaranteed Minimum Rate- This is the contractual minimum interest rate that can be declared for renewal of existing contracts. As rates change annually, insurance companies offer this minimum so you can always expect to receive at least this rate and no less.

Bailout Rate- Very few contracts offer this option. This sets a benchmark rate, usually just above the guaranteed minimum that allows you to leave the contract without penalty if the renewal rate ever dips below.

Bonus Rate– Here you have nothing more than additional interest credited to the account when the contract is issued.

Yield to Maturity- Most important of all, this tells you actually what to expect for a total yield in the contract and is the best way to truly compare two fixed annuities. When all growth rates are factored in, what’s your cash on cash rate of return? There are a few different ways to do this.

  • With multi-year guarantees the rate never changes so the Yield To Maturity (YTM) is identical to the guaranteed rate.
  • Current yield to maturity takes into account the effective yield assuming the declared interest rate will be stable throughout the term.
  • Guaranteed yield to maturity assumes the current rate is only good for one year and all following years will revert to the guaranteed minimum rate for the remainder of the term.
  • **All yield to maturity figures would need to be adjusted upwards if a bonus is included with the contract.

Fixed Annuity Rates Summary:

As you can see, there are potentially several rates you’ll need to understand in order to properly evaluate the growth potential of any fixed annuity you may consider. Take the analysis step by step to make sure you understand exactly what kind of deal you’re getting.

Also be sure to shop around as there are literally hundreds upon hundreds of available fixed annuity contracts when all companies and surrender periods are considered. If this seems like a major challenge, relax; we’re always available to help you find the best fixed annuity rates and the most appropriate solution to your situation.