Interest Earned And Minimum Guarantees
Fixed annuities provide a minimum guaranteed return, which is a safe money feature that annuities have in common with Series EE Savings Bonds. However, unlike Savings Bonds, you do not need to wait twenty years for the annuity’s guarantee to kick in.
If the insurance company believes they can pay extra interest from their general account, above and beyond its minimum guarantee, the company will declare a fixed rate of interest and pay the annuity owners a stated interest rate for a defined period. Or, in the case of a fixed index annuity, they could use the extra interest to link the earning of interest to the performance of an external index for a period.
The major difference between a fixed rate annuity and a fixed index annuity is in the crediting of excess interest above the minimum guarantee.
Watch our video titled, "The cd alternative ... the multi year guaranteed annuity (myga)"
Market Value Adjustment (MVA)
An MVA feature means changes in the interest environment are taken into account if and only if the annuity is surrendered prematurely. What this can mean is if rates have risen since you started the annuity, the penalties for cashing out could be higher than the schedule stated in the policy, and if rates have fallen since you took out the annuity, the penalties could be lower or even zero. The reason behind Market Value Adjustments is found in the “Buyer’s Guide To Fixed Deferred Annuities” produced by the National Association of Insurance Commissioners.
Since you and the insurance company share the risk, an annuity with an MVA feature may credit a higher rate than an annuity without that feature. If you don’t surrender the policy during the period, you never pay the MVA and you might get a little better rate.
HOW MUCH CAN I PUT AWAY ?
Although one can find fixed annuities with a minimum premium as low as $ 50, typically an annuity requires a $ 5,000 initial premium ($ 2,000 for IRAs). Some annuities are single premium - meaning that you cannot add to them, and others are flexible premium - meaning you may contribute more in the future if you wish. Many carriers require advance notice if you are going to put away more than a million dollars at a time. Advantage Compendium reports the average annuity premium is around $50,000.
Not to be confused with the surrender period, the maturity date is the longest one can keep annuity interest deferred before you must take it out. Maturity dates usually occur when the annuitants celebrate their 80th birthday. Not to be confused with the surrender period, the maturity date is the longest period one can keep annuity interest deferred before withdrawing it. Again, maturity dates usually occur when the annuitant celebrates their 80th to 90th birthday, though some new policies may extend the maturity date to age 100 (remember, the annuitant is the person upon which the annuitization life income is based).
A maturity date is not life without parole. The maturity date is not how long you must keep your annuity, but how long the insurer will let you keep your money with them. To repeat, the annuity owner may take their money out or annuitize the contract prior to the maturity date. The maturity date is the longest time an annuity owner may force the carrier to keep the contract, not the other way around.
LIQUIDITY AND PENALTIES
Fixed annuities offer a wide variety of term choices. The fixed annuity selected may have a penalty for early withdrawal ranging from as short as a year to as long as twenty years, although most permit the withdrawal of at least the interest earned each year without penalty. Insurance companies use these penalties, also known as surrender penalties or charges, to recoup initial costs if an annuity is cashed in prematurely.
A surrender penalty only becomes a charge if the policy is surrendered; therefore, you need to determine whether the term of the annuity and liquidity provisions match your liquidity needs.
FEES AND CHARGES
There are always costs, but fixed annuity fees and expenses are not charged in the same way that a variable annuity or mutual fund does; these types of products are charged fees and expenses in a more similar way that a bank charges its fees and expenses.
For example, let’s say the bank says they will pay 4% interest on their CD. Okay, what are the bank’s fees and expenses on this CD? If your answer is you cannot tell and it doesn’t matter because all you really care about is the final rate you get on your money, the same logic applies to fixed annuities. The insurance company doesn’t deduct a management fee and share a net return with the customer. Instead, just like the bank, the insurer pays a fixed return, which may be stated as a fixed rate or as fixed participation in an index. Might some banks have lower operating costs or higher revenues than others and thus offer a higher rate? Yes, and an insurer could spend less on office supplies than another insurer and thereby ultimately be able to pay a higher rate on fixed annuities. Who knows how you could translate all of this into fees?
Annuities do have penalties for early withdrawal if the customer surrenders the annuity early, which is why you need to match the period with your goals, keeping in mind that all annuities are designed to be long-term savings instruments. States permit annuities to charge annual contract fees of up to $ 50 a year, and many variable annuities do charge annual fees; however, we find no evidence of any fixed annuities charging this type of fee.
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