Although fixed indexed annuities are the most popular type of fixed annuity product right now, basic fixed rate annuities are still a good product if you are looking for retirement income guarantees. They are simpler and don’t have all of the bells and whistles of fixed indexed annuities, but fixed rate annuities cost less and offer the basic benefits that many people are looking for. In Stan Haithcock’s Marketwatch article, “Which ‘fixed’ annuity can fix your retirement?“, he does an excellent comparison of fixed rate and fixed indexed annuities. Each product has its place in the market for different reasons, so consider all of the pros and cons for each type of fixed annuity before you purchase one of them. The fixed rate annuities compared in the article are MYGAs, multi-rate guaranteed annuities. They are similar to CDs in that they guarantee a specific interest rate for a certain time period. After that time frame, most of these MYGAs can be annuitized as an immediate annuity or transferred to a higher paying single premium immediate annuity with another insurer.
The return on investment differs with the fixed rate annuities and fixed indexed annuities. Indexed annuity returns are based on the gains in whichever index to which your product is linked. Keep in mind that your rates will be capped and based on the listed participation rate from your insurer. Fixed rate annuities offer you a guaranteed rate up front that will last as long as your guaranteed time period. Right now, most MYGA time frames are between 3 and 10 years. Fixed indexed annuities certainly have the potential to perform better than fixed rate annuities. There is also the potential to have a zero return if markets are down, so you have to determine whether or not you are willing to take that risk.
Both of these fixed annuities offer lifetime income options. Indexed annuities typically have an attached income benefit rider that grows every year and can be used for future income. With a fixed rate annuity, you can annuitize your product to guarantee a stream of retirement income. If another insurance company is offering a better immediate annuity payment when your contract is up, you can transfer to that SPIA to create retirement income as well. Stan’s article says that the exclusion ratio offered when MYGAs are annuitized offers tax benefits that you will not find with a fixed indexed annuity. FIAs are taxed at ordinary income levels.
Surrender charge periods are an important thing to consider when looking at annuity products. The most popular lengths for MYGAs right now are 3, 4 and 5 years. The majority of fixed indexed annuities have surrender charge periods of 10 years. The longer the surrender charge time frame associated with an annuity, the higher the commission paid to an advisor. Keep that in mind so that you choose an annuity with a surrender charge period that works for your goals. If you know that you don’t want to touch your fixed indexed annuity for a decade, then the 10 year surrender charge period won’t be a problem. Since the current interest rate environment is low, shorter surrender time periods might make sense to take advantage of potential rising interest rates in the future.
It’s also important to consider fees when you are looking at purchasing an annuity. Fixed rate MYGAs do not have any annual fees. Fixed indexed annuities on their own do not have annual fees. An added income rider will cost around .5% to 1% annually for the life of the annuity. These fees are taken out of the index value, not the rider value. Those two calculations are separate. Fixed rate and fixed indexed annuities are both good products to help secure your financial future. Before purchasing either a fixed rate or fixed indexed annuity, compare both products to determine which one will best meet your specific needs. There are benefits and risks associated with any annuity. A comparison against your goals is the best way to figure out which annuity will bring you the most value.
Written by Rachel Summit