Fixed annuities can be a great alternative to CDs

Matt Weyers Insurance Specialist
Matt Weyers
Insurance Specialist

Many conservative investors choose Certificates of Deposits (CD’s) as the go-to safety component of their portfolio. However, we are in uncharted territory in recent history with interest rates being at sustained, historic lows. This environment has made finding safety and decent growth potential the hardest it has ever been. For short duration (three years or under), CD’s are still a good option for a high degree of safety and guaranteed return. To get that guaranteed rate of return, you need to keep your money with the institution you purchased the CD with for a set period of time. If you take your money before that set amount of time, you may have to pay an early withdrawal penalty. Fortunately, when you look at longer term lengths (three and five years), there are better investment options available.
Fixed annuities act much like a CD and have guaranteed rates of return for a specified period. They are tied to the low interest rate environment as well, but the three and five-year time frames are paying on average .5% to .9% higher than CD’s, depending on the company. Some companies will give slightly higher interest rates if you put in a minimum amount, i.e. $250,000 or more. Fixed annuities are backed by the strength of the issuing company, and the more risk you are willing to accept i.e. the companies rating, the higher interest rate you will be able to get.
When we look for options for our clients we like to look at B++ or better on the AM Best ratings scale. Just like banks, insurance companies have to protect themselves against investors taking money sooner than anticipated. CD’s have early withdrawal penalties and annuities have surrender charges, which are calculated as a percentage of the value at time of cashing in.
Unlike CD’s, some fixed annuities will allow you access to some of your money without penalty. For instance, some companies will allow you to take 10% a year or interest accrued. Or, if you are terminally ill, or needed some kind of custodial Long Term Care either in the home or nursing home, some companies will allow you to have access to 100% of your funds. If you are willing to have no access to your funds at all for a set period of time, (five years or more), you may be able to find an insurance company that will offer fixed annuities with even higher rates.
If you are looking for safety but want to earn more money than the CD available through your bank, a fixed annuity is worth a look. Just like anything else they have pros and cons, but in your unique situation, the pros may out way the cons. There is only one way to find out; come in for a meeting with me and see what is available to you in the fixed annuity world.

Annuities are insurance products and not insured by the FDIC, the NCUSIF or any other government agency, nor are they guaranteed by, or the obligation of, the financial institution that sells them. All product guarantees, including optional benefits, are subject to the financial strength and claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer from which this annuity is purchased, by the insurance agency from which this annuity is purchased or any affiliates of those entities and none makes any representations or guarantees regarding the claims-paying ability and financial strength of the issuing insurance company. Similarly, the issuing insurance company does not back the financial strength of the broker/dealer or any of its affiliates.

Annuity contracts contain charges, limitations, exclusions, holding periods, termination provisions and terms for keeping them in force. Contact your financial professional for costs and complete details.

Distributions of taxable amounts are subject to ordinary income tax and, if made before age 59½, may be subject to a 10% Federal income tax penalty. Some broker/dealers and financial professionals may refer to the 10% Federal income tax penalty as an “additional tax” or “additional income tax,” or use the terms interchangeably when discussing withdrawals taken prior to age 59½.  Additionally, state early withdrawal penalties may apply. 

Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. This information is for educational purposes only, and should not be construed as investment advice. We advise you to seek advice from an investment professional, preferably one with a fiduciary responsibility to  his or her clients, before making any investment purchase.