Analysis of Annuity Rates
By Bryan J. Anderson
For people considering an annuity, the decision process is a daunting task. Interest rates play an important role when grading a specific product. The maze of information available causes a person to lose confidence in the final decision.
There are some key interest rate components to focus on that should filter out the irrelevant information and make the decision process quite a bit easier. Since variable and equity-indexed annuities float with the stock market, a broad focus on interest rate components is irrelevant. Let's focus on Fixed Annuities.
There are four key interest rate components in an annuity contract. This should help investors understand where to direct the most attention.
Base Guaranteed Rate: This is the contractual minimum rate that the annuity will yield. This rate will range from 1-3.5% except in the case of a CD-Type Annuity, which will lock a higher rate for the life of the contract.
Current Rate: Each year an insurance company will declare a rate to be applied to in-force contracts. This keeps competition alive in the insurance industry. Each company is going to declare a rate based on portfolio performance, future business projections and competitive comparison. Finding a solid current rate is a good indicator of the company's financial health and economic outlook in relation to the financial industry as a whole.
Bonus Rate: Many contracts inject a bonus rate as an additional teaser. Certain annuities offer excessively high bonuses. Several factors need to be considered in regards to bonus rates. Some of these rates are only credited at contract maturity which adds an additional surrender charge if the annuity is cancelled early. Big bonuses often lead to a longer surrender period because of the added cost to the company. In many cases, bonus rates turn out to be no bonus at all. Verify all other contract components to your satisfaction before a bonus is considered.
Yield to Surrender: This represents the effective rate of return projected throughout the contract time period. It is also the single most important interest rate to consider. An advisor should offer the yield to surrender in a current and guaranteed minimum rate basis. Calculating this yield will objectively determine the validity of a bonus rate.
In addition to the major interest rate components, there are a couple other things that deserve consideration when evaluating interest rates. These include a company's renewal rate history and bailout rates.
Renewal Rate: Renewal rate history is an excellent indication of a company's long-term performance. Historical rates can be matched to past economic cycles to show how the specific company has performed during various market scenarios. Inflation and deflation are valid concerns that need to be addressed when considering a substantial cash investment over a long period of time. This is one of the better ways to compare an annuity's performance in relation to past interest rate environments.
Bailout Rate: Not all annuities offer a bailout rate. This is a component of high quality contracts offered by some very stable companies. The bailout rate is usually set just above the base guaranteed rate. It allows an investor to cancel the contract free of penalty if the declared interest rate is at or below the bailout rate. This offers additional freedom to the contract holder and opens up options for placement of the funds without the usual cost of surrendering the annuity.
This basically sums up the things a person needs to consider when evaluating interest rates in annuity contracts. Annuity rates are still only one of the many components that a person needs to understand before a confident purchase can be made.
Annuities are extremely versatile financial products that will play an expanding role in the financial planning landscape. Choosing a product, however, presents a unique challenge because of the hundreds of products a person has to consider.
Annuity Straight Talk has laid out the guidelines for suitability and product selection. Visit the site for a list of all necessary contract components and the objective analysis needed to make an educated purchase.
By Bryan J. Anderson
For people considering an annuity, the decision process is a daunting task. Interest rates play an important role when grading a specific product. The maze of information available causes a person to lose confidence in the final decision.
There are some key interest rate components to focus on that should filter out the irrelevant information and make the decision process quite a bit easier. Since variable and equity-indexed annuities float with the stock market, a broad focus on interest rate components is irrelevant. Let's focus on Fixed Annuities.
There are four key interest rate components in an annuity contract. This should help investors understand where to direct the most attention.
Base Guaranteed Rate: This is the contractual minimum rate that the annuity will yield. This rate will range from 1-3.5% except in the case of a CD-Type Annuity, which will lock a higher rate for the life of the contract.
Current Rate: Each year an insurance company will declare a rate to be applied to in-force contracts. This keeps competition alive in the insurance industry. Each company is going to declare a rate based on portfolio performance, future business projections and competitive comparison. Finding a solid current rate is a good indicator of the company's financial health and economic outlook in relation to the financial industry as a whole.
Bonus Rate: Many contracts inject a bonus rate as an additional teaser. Certain annuities offer excessively high bonuses. Several factors need to be considered in regards to bonus rates. Some of these rates are only credited at contract maturity which adds an additional surrender charge if the annuity is cancelled early. Big bonuses often lead to a longer surrender period because of the added cost to the company. In many cases, bonus rates turn out to be no bonus at all. Verify all other contract components to your satisfaction before a bonus is considered.
Yield to Surrender: This represents the effective rate of return projected throughout the contract time period. It is also the single most important interest rate to consider. An advisor should offer the yield to surrender in a current and guaranteed minimum rate basis. Calculating this yield will objectively determine the validity of a bonus rate.
In addition to the major interest rate components, there are a couple other things that deserve consideration when evaluating interest rates. These include a company's renewal rate history and bailout rates.
Renewal Rate: Renewal rate history is an excellent indication of a company's long-term performance. Historical rates can be matched to past economic cycles to show how the specific company has performed during various market scenarios. Inflation and deflation are valid concerns that need to be addressed when considering a substantial cash investment over a long period of time. This is one of the better ways to compare an annuity's performance in relation to past interest rate environments.
Bailout Rate: Not all annuities offer a bailout rate. This is a component of high quality contracts offered by some very stable companies. The bailout rate is usually set just above the base guaranteed rate. It allows an investor to cancel the contract free of penalty if the declared interest rate is at or below the bailout rate. This offers additional freedom to the contract holder and opens up options for placement of the funds without the usual cost of surrendering the annuity.
This basically sums up the things a person needs to consider when evaluating interest rates in annuity contracts. Annuity rates are still only one of the many components that a person needs to understand before a confident purchase can be made.
Annuities are extremely versatile financial products that will play an expanding role in the financial planning landscape. Choosing a product, however, presents a unique challenge because of the hundreds of products a person has to consider.
Annuity Straight Talk has laid out the guidelines for suitability and product selection. Visit the site for a list of all necessary contract components and the objective analysis needed to make an educated purchase.
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