People often call and ask about the traditional fixed annuities otherwise known as bonus annuities. They will see a rate for a 10 year annuity that pays 8% interest posted on a website like ours www.AnnuityRateShopper.com. When I tell them that the 8% interest is a first year interest rate and that the subsequent rates reset annually (not going below a preset floor, generally 1%) a lot of times they feel cheated or misled.
I think if people had a better understanding for how these bonus annuities worked they wouldn’t have the negative feeling that many have after finding out that the advertised rate is only for the first year, and not guaranteed for the life of the conract. Many people are familiar with cd’s and cd type annuities (Multi Year Guarantee Annuities) where depending upon how long of a contract they purchase they know exactly what their interest rate is going to be. To illustrate my point most cd type annuities you can purchase are as simple as this: 5 year contract, 3.15% interest rate. That means you will earn 3.15% interest each of the first 5 years and after that you are free to take your money wherever you please without any penalties or surrender charges. Simple!
Bonus Annuities (or Traditional Fixed Annuities) on the other hand might have a better first year rate but no guarnateed rates in the subsequent years of the contract. For example. You might have an 8 year contract with a first year rate of 7% and a minimum guarantee of 2%. What that means is in year 1 the insurance company will pay you a set rate of 7%. In years 2-8 the insurance company does not know what rates will be at that time, and as such will declare a rate at the beginning of the year in those subsequent years.
Insurance companies take on risk when issuing a multi year guarantee annuity or CD Type annuity because they have to hedge their bets on future interest rate movements. In a traditional fixed annuity or bonus annuity they don’t have to take on as much risk because they are only guaranteeing a rate for 1 year.
the bottom line is this: If you feel most comfortable knowing exactly what your rate is going to be each year then you are better off with the Multi year guarantee annuity or CD Type annuity. However in a rising interest rate environment, you have the opportunity in the bonus annuity or traditional fixed annuity to not only take advantage of the first year rate but increased rated in the subsequent years based on higher interest rates. Where are rates going from here? No one knows but I would suspect that higher is the more probable answer.
To find our what is the best annuity for your particular situation give us a call at 888-515-7152 or email us at ryan@annuityrateshopper.com.