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.
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