Fixed annuities can be a great alternative to CDs

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… | Read More »