Raising interest rates have crippled the mortgage industry and stock market quite a bit so far this year. However there may be some good news for people looking to add annuities to their portfolio. Rates which were around 1% earlier this year are now going north of 4% on fixed annuities. Many A Rated carriers are offering these new rates on annuities starting as low as a 3yr contract term. If you have some uncertainty on the market or have had funds sitting in cash on the sidelines, it might be beneficial to review your options at this time. If you have questions about Annuities or would like to get a quote, talk to your licensed agent. Our advisors at Dream Cap Investments are always here to assist with a portfolio review or answer any questions regarding investments, personal risk management or annuities.
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What Is a Fixed Annuity?
A fixed annuity, offers a fixed guaranteed rate of return for a predetermined period of time. That period of time is the length of the contract which works in a similar fashion as Certificate of Deposit (CD) that are usually offered by banks. Annuity contracts usually range between 3 to 10 years although you may at times find shorter or longer terms. CD's on the other hand offer terms starting at 3 months but the interest rate offered by a CD tends to be much lower. Unlike a CD, an Annuity gives you the option to turn your account balance and earned interest into lifelong pension-like income. It is not a requirement to take lifelong income but instead an option that can be requested by the contract owner. The fixed annuity guarantee is backed by the financial strength of the insurance company, which can be determined by their financial rating. Usually an A plus rating would indicate strong financial strength where a B rated might be a little more vulnerable. Fixed Annuities are also known as a multi-year guaranteed annuity (MYGA),
How do I Know Which Annuity To Choose?
There are different types of annuities to choose from such as, Fixed, Indexed or Variable which are the most common types. A Fixed Annuity could the easiest to understand as it is simply a 3 to 10yr contract which offers a fixed guaranteed rate over a period of time. A few questions you can ask yourself to help determine which Annuity to choose include:
1. How long from now will I need to Access those funds?
4. How much risk can I afford to take in my portfolio?
2. How much liquidity do I need to keep apart in the bank if I have an emergency?
3. What is the Financial Rating of the carrier? Are they financially strong?
Depending on how you answer these questions will help determine the type and the length of Annuity you choose.
Traditionally individuals closer to Retirement such as 50's and 60's would be better candidates for Fixed Annuities as they are trying to reduce risk in their portfolio as they approach retirement. They may be looking to generate income from funds they've accumulated over the years and use the earned interest as additional income. It is not uncommon however for younger individuals who are risk averse to invest annuities, however it may not be as profitable as investing in mutual funds, ETFs, stocks and bonds over the years. As rule of thumb younger investors tend to have a higher risk tolerance and a longer time frame ahead of retirement to recover from a recession or a bear market. Y
In the event of death during an Annuity contract, your spouse or named beneficiaries would inherit the remaining account balance including interest you had accrued prior to death. It is important to name your beneficiaries at time of application and review it yearly to make sure it is up to date. If you don't have a surviving beneficiary upon your death all remaining annuity assets could be surrendered to the issuing insurance company.