You Never Thought About a Fixed Annuity Until CD Rates Dropped
Only looked at CDs before? Here is a quick summary of why you should (and maybe shouldn't) consider a fixed annuity.
With falling interest rates, many people are looking for alternatives to the traditional safe haven of CDs offered by banks.
A fixed annuity is a tax-deferred retirement savings vehicle that provides fixed asset accumulation, much like a CD. However, unlike a CD, the interest earned in your fixed annuity is not taxed until withdrawn (with a CD it’s taxed when earned). Like a CD, the rate is guaranteed. However, with a fixed annuity, that guarantee is subject to the claims-paying ability of the insurer and is not FDIC insured.
Fixed Annuity Rates Are Much Higher Than CD Rates
The CD Rates that banks are now offering are significantly lower than they were just a few months ago. The difference between top fixed annuity rates and top CD rates has widened significantly over the last few months.
As you can see from the chart below, CD rates pale in comparison to those of fixed annuities. As of August 2, 2020, a 5 year CD is paying 1.56%, whereas a 5 year fixed annuity is paying 3.45%. Over the full term, the fixed annuity would generate $10,430 more in interest for every $100,000 invested.
Top CD Rate
Top Fixed Annuity Rate
Top rates as of 08/02/20. according to bankrate.com; blueprintincome.com
CDs vs Fixed Annuities: What You Need to Know
Fixed annuities offer a guaranteed return – similar to CDs – but can offer a higher interest rate than savings accounts by requiring you lock in your money for a longer period of time. However, there is more to consider than just the rate and the term. Here’s a side-by-side comparison of some key elements:
2 years – 10 years
3 months – 5 years
Taxes on interest gains deferred until money is withdrawn
Interest taxable annually as earned
Typically, a portion of the account balance is available for withdrawal annually
Generally no (free) access to account balance is available (no-penalty or liquid CDs are an exception)
Can usually (but not always!) withdraw accumulated interest or 10-15% of cash value for free if aged-59½ or older
All withdrawals are charged, typically equal to a portion of the interest you’ve earned
Backed primarily by the issuing insurance company
CDs are insured by the FDIC
Does not cover all products or all companies. Specific information available by product upon request. Updated as of August 2, 2020.
Another thing to look out for is that a fixed annuity can go by many other names – such as:
- Fixed deferred annuity (FDA)
- Fixed rate annuity
- Multi-year guaranteed annuity (MYGA)
- CD-like annuity
- Single premium deferred annuity (SPDA)
Whatever the name, you’ll just want to be sure that the guaranteed rate lasts for at least as long as the surrender period.
Consider an Insurer’s Financial Strength Ratings
Fixed annuity guarantees are subject to the claims-paying ability of the insurer. In general, an insurer’s financial strength ratings assigned by a third-party rating agency are a good shorthand for the insurer’s claims-paying ability. There are four major insurance company rating agencies in the U.S. All insurers on the Blueprint Income platform have at least a B+ rating from AM Best.
Top 3 Year Rate
Top 5 Year Rate
Top 7 Year Rate
As of 08/02/20, according to blueprintincome.com
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Each rating is assigned based on an independent assessment of the insurance companies’ financial strength and ability to meet its ongoing insurance policy and contract obligations – in short, its ability to safe guard your money and pay you what you’re owed. A.M. Best defines their rates as follows:
- A++ and A+ have a SUPERIOR ability to meet their ongoing insurance obligations
- A and A- companies – an EXCELLENT ability to meet obligations
- B++ and B+ are still considered to have a GOOD ability.
You can read more about A.M. Best’s rating criteria here.
Have more questions about fixed annuities or MYGAs? Check out our fixed annuity guide and see some recommended reading below. We’re also always happy to schedule a time to chat.