Interest Rates

The biggest problem that consumers face with most fixed annuities is uncertain renewal rates. Because of severe early year surrender penalties, annuitants are left at the mercy of the insurance company. Before buying an annuity, it is very important to look at the interest rate crediting history of the carrier. Ask yourself (or better, the selling party) the following questions:

1. Has the carrier consistently paid a fair return given the then present market conditions?
2. Do existing contracts and new contracts receive the same rate of interest?
3. If buying a bonus annuity, ask what the second year's rate will be if everything remains static? (Remember, high first year rates usually mean lower rates in subsequent years.)
4. What is their portfolio currently yielding? Can they "afford" to pay current rates?
5. Do you have to annuitize in order to receive the projected (or current) rate?

If you do not like the answers to the above questions, or you don't feel comfortable trusting the insurance company, you might be interested in a "guaranteed" annuity. These annuities usually guarantee an interest rate for a period of years and this period is equal to their surrender penalty. For example, you might buy a 5 year annuity that guarantees a 6.25% rate of return for each of those five years. The surrender penalties on this annuity could be 5% per year, but at the end of year five the penalty would equal 0%.

Guarantees vs. Promises
Fees
Interest Rates
Carrier's Financial Strength

This document was last modified on July 15, 1999

Copyright ©1999, The Jacobs Company, All Rights Reserved