Who to Get Fixed Annuities From

As annuities gained in popularity back in the 1980’s, the number of products and companies offering them skyrocketed. With over 200 life insurers offering hundreds of different annuity products, the consumer is left bewildered among the overwhelming number of choices.

Fixed annuities became especially popular due to the high interest rates that were available back then. It was possible to lock in a very favorable rate, typically higher than the prevailing bank CD rates, for a period of time. Because of the tax deferral of interest earned in a fixed annuity, they held a tremendous, competitive advantage over taxable equivalents.

The primary lure for investors was the high interest rates that were heavily promoted by insurers with some “teaser” rates that were in the stratosphere. These high rates captured a lot of high yield seekers, who were then brought back down to earth once the rates adjusted to current market conditions.

After the collapse of Executive Life in the 1990’s, investors developed a new awareness of the possible dangers of high yielding investments. High yields typically meant, high risk as far as the underlying investments were concerned. In order to generate high yields for a fixed annuity, or a CD in the case of a bank, the investment managers of the life insurance company had to dig down deep into the ditch of low rated, high risk bonds to fashion together a portfolio.

The hard lesson for investors was that, a guarantee of principle was only as sound as the quality and creditworthiness of the underlying assets of the company. Although most of the investors manage to salvage their principle from the collapse, they walked away with little or none of their gains.

So, the question as to who to get fixed annuities from suddenly took on a much greater significance.

How to select a fixed annuity provider

Look at the top

The life insurance industry has a much better track record than banks as far as maintaining solvency and stability even during the worst of economic times. During the depression, as banks were closing left and right, life insurance companies became the source of much needed capital for the government to provide services and arm our military.

Still, when you purchase a fixed annuity from a life insurance company it becomes an obligation to pay you back based on the terms of the contract. That obligation and the guarantees within the contract are backed by the strength and creditworthiness of the life insurer which are measured and ranked by several rating agencies such as A.M. Best and Standard and Poor’s.

The very first step in selecting a fixed annuity provider is to narrow the choices to those that sit near the top of their rankings. The list of A-rated companies, or better, still numbers over 35 which is still a good-sized selection.

You may find that B-rated companies offer higher initial yields, but, if you remember the lesson, they do so for a reason. Either their portfolio quality has been deemed questionable, or the rating agency has determined that the company’s financial condition is trending in the wrong direction. With so many higher rated companies offering fixed annuities, it would seem an unnecessary risk to settle for less quality.

The devil is in the details

Fixed annuities are time tested as solid retirement vehicles, however, they are not all the same and your search needs to include a close look into the contract details. There are several aspects of the contract that can vary from one provider to the next. Charges, surrender fees, interest crediting, withdrawal provisions, and payout options, all nestled in the small print of the contract, can have an impact on the performance of the annuity and its total cost of ownership.

The most prominent charge or expense found in the contract is the mortality charge, or cost of insurance. These should be somewhat standardized as the insurer relies on published life expectancy tables. However, they are also affected by the company’s actual experience, so if a company has poor experience they might charge more. Other charges that are deducted as a fixed expense include administrative fees and sales costs. All of these expenses should be examined and compared.

Surrender fees can also vary from one contract to the next. One of the advantages of fixed annuity is the ability to access your funds, up to 10% of the accumulate amount in a year, but, to do so, the insurer will deduct a surrender charge. The variables in surrender charges include the amount of the charge, typically in the 7% to 10% range, and the number of contract years in which the charge is assessed. The typical contract begins with an initial surrender charge at the top end, say 7% and then it is reduced by a point in each subsequent year. In this example, there would be no surrender charge after 7 years, however, the withdrawal may still be subject to an IRS penalty of 10% for an early withdrawal prior to age 59 1/2 .

Interest crediting methods, a key aspect of the competiveness of the product, also vary. Fixed annuities usually provide an initial fixed rate that is locked for a specified period of time, after which, an adjustment is made for another period of time. The basis for determining the adjusted rate should be spelled out as well as any new lock period. Be on the lookout for contracts that reset the surrender charges after a new rate lock. You can also review the company’s experience on yields generated from its investment portfolio. Look for companies that consistently produce stable yields over time.

The payout options for income disbursement are also an important consideration. Some payouts are based on a variable interest rate which can cause your income to fluctuate along with interest rates. Others may apply a fixed rate for a period of time. Your preferences are important in determining which is most suitable for you. Inflation riders also vary between Cost of Living indexes and Consumer indexes each producing a very different rate of growth on income payments.

Determining who to get fixed annuities from doesn’t have to be a daunting experience. This guideline can streamline the process and put you in control so you’re not at the mercy of the annuity sales person.