What To Consider When Purchasing a Fixed Annuity
When safety and security is an issue, you might find yourself, like many others, turning to the guaranteed investment of the fixed annuity. While there's many reasons to choose either a CD or a fixed annuity, the annuity often has features that make it a preferential choice. Many times, you'll find the rate higher in the annuity and because the product gets preferential tax treatment, the money grows even faster. There are differences in annuities and you'll need to do some shopping in order to find the best one for your situation.
Of course, the interest rate is normally the first thing most people check but there's more differences when you compare fixed annuities than just the interest rate. Interest rate or rate of return is a good place to begin, but you need to look further to find the best fixed annuity for your situation.
See how long the company guarantees the initial interest rate. If the rate is a one -time item, such as a bonus rate you need to get out the calculator and see if it really pays over the long run. Some rates that have a lower initial rate because of a bonus but higher in the second year may actually pay more in the long run.
There's another guaranteed rate on the product. It's the minimum guarantee the company pays no matter what the surrounding interest environment becomes. Even if banks pay percent on CDs, if the minimum guarantee is 2 percent, you'll never receive an interest rate lower than that 2 percent minimum.
On occasion, minimum investments become important. If you plan to remove money periodically until you deplete your policy, you'll want to avoid a fixed annuity with a penalty if the funds fall below a specific amount. If you're a smaller investor, you won't even be able to start a fixed annuity if your funds don't meet the company minimum.
Pay attention not just to the initial investment but also the amount of subsequent investments if you plan to ad a little at a time. Even if you don't think you'll add more funds, you'll probably be surprised when you realize that not only is an annuity tax-deferred, it makes your organization easier if you want to simplify your finances and narrow it down to only a couple of investments. You also name the person that you want to receive your funds if you pass away.
Surrender charges, like early withdrawal penalties are important when you invest your money. Some companies surrender period is shorter than others are. You might find an annuity that allows you to invest for one year and then remove the funds without penalty. Other products may have charges that last not just your lifetime unless you take annuity payments.
See how your heirs have to take the proceeds. There are a few annuities on the market, which only allow heirs to annuitize or they face a stiff surrender charge. These are not the best annuities unless that fits your wishes. Some parents are delighted to know that their children won't be able to spend the funds all at one time.
Even if you never plan to remove money from your annuity, it's comforting to know you have access before the end of the surrender period. The amount of penalty free withdrawal varies from company to company with some companies offering interest only and others allowing you to take as much as 10 percent per year cumulative if you don't take it in one year. Most companies offer withdrawal right somewhere between the two extremes.
Be as careful when shopping for an annuity as you are for any other major purchase. Most people don't buy the first car they see, they get competitive offers, look over all the features and then choose. Do the same thing when you buy an annuity and you'll buy the best annuity for your situation.
Of course, the interest rate is normally the first thing most people check but there's more differences when you compare fixed annuities than just the interest rate. Interest rate or rate of return is a good place to begin, but you need to look further to find the best fixed annuity for your situation.
See how long the company guarantees the initial interest rate. If the rate is a one -time item, such as a bonus rate you need to get out the calculator and see if it really pays over the long run. Some rates that have a lower initial rate because of a bonus but higher in the second year may actually pay more in the long run.
There's another guaranteed rate on the product. It's the minimum guarantee the company pays no matter what the surrounding interest environment becomes. Even if banks pay percent on CDs, if the minimum guarantee is 2 percent, you'll never receive an interest rate lower than that 2 percent minimum.
On occasion, minimum investments become important. If you plan to remove money periodically until you deplete your policy, you'll want to avoid a fixed annuity with a penalty if the funds fall below a specific amount. If you're a smaller investor, you won't even be able to start a fixed annuity if your funds don't meet the company minimum.
Pay attention not just to the initial investment but also the amount of subsequent investments if you plan to ad a little at a time. Even if you don't think you'll add more funds, you'll probably be surprised when you realize that not only is an annuity tax-deferred, it makes your organization easier if you want to simplify your finances and narrow it down to only a couple of investments. You also name the person that you want to receive your funds if you pass away.
Surrender charges, like early withdrawal penalties are important when you invest your money. Some companies surrender period is shorter than others are. You might find an annuity that allows you to invest for one year and then remove the funds without penalty. Other products may have charges that last not just your lifetime unless you take annuity payments.
See how your heirs have to take the proceeds. There are a few annuities on the market, which only allow heirs to annuitize or they face a stiff surrender charge. These are not the best annuities unless that fits your wishes. Some parents are delighted to know that their children won't be able to spend the funds all at one time.
Even if you never plan to remove money from your annuity, it's comforting to know you have access before the end of the surrender period. The amount of penalty free withdrawal varies from company to company with some companies offering interest only and others allowing you to take as much as 10 percent per year cumulative if you don't take it in one year. Most companies offer withdrawal right somewhere between the two extremes.
Be as careful when shopping for an annuity as you are for any other major purchase. Most people don't buy the first car they see, they get competitive offers, look over all the features and then choose. Do the same thing when you buy an annuity and you'll buy the best annuity for your situation.
About the Author:
Christopher Tyler discusses of fixed annuities and other investment options for retirement. As the economy slides into the worst recession in decades more and more investors are looking for safe options to grow their investment for retirement. Visit our site to learn more about the fixed annuity as a viable investment for retirement.
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