How to shop for a fixed-rate annuity so you’ll get the best deal

If you’re looking for a haven for your money, a three-year fixed-rate annuity lets you choose between a 2.00% annual payment or a 4.25% annual payment! Rate aside, the two products are pretty similar.

If you’re looking for a five-year guarantee, rates available range from 2.60% to 4.65%, according to the AnnuityAdvantage database of annuity rates.

Interest rates for annuities of the same term vary widely. If you don’t shop around, you’ll almost certainly be earning far less interest than you could. Unfortunately, many local pension agencies represent only a few pension companies, sometimes just one.

Before I give tips on shopping, here is some background information:

A fixed-rate deferred annuity (also known as a multi-year guaranteed annuity, or MYGA) is similar to a bank deposit confirmation. It also pays a guaranteed interest rate for a set term. Unlike CDs, annuities are tax-advantaged. Annuities issued by insurance companies are not federally insured like CDs, but state-mandated guarantor associations provide some level of protection.

While rate isn’t the only factor in choosing an annuity, it is the most important thing when other factors are equal. Here are the key considerations.

How long is your money tied up?

The term is the duration of the annuity guarantee period. Most multi-year annuities range from two to 10 years.

Longer-term annuities tend to pay more than shorter-term ones. But today the interest rate differentials are not large. For example, the best three-year annuity in our database now guarantees 4.25%. You can get up to 4.72% at seven years and 4.75% at 10 years.

Is it worth tying up your money longer for a slight jump in interest rates? It all depends on your situation and your assessment of future interest rates. One solution is to invest part of your money in, say, a three-year pension and part in a five, seven, or ten-year contract. This is sometimes referred to as a pension ladder.

How much can you take out while the policy is in effect?

When the term ends, you have the opportunity to get your principal back plus any accrued interest if you have reinvested interest. You can then take the proceeds in cash and pay taxes on the accumulated interest (assuming it’s a nonqualifying annuity). However, you can still defer all taxes by transferring the money to a new annuity with the same insurer or transferring it to a different insurer via a 1035 exchange.

What if you want or need some or all of your money back? before does the term end? If it some You may not have a problem with your money, as most pension plans allow partial withdrawals at no charge. Many allow you to withdraw up to 10% of the contract value annually, free of charge. However, some annuities do not have this provision and in return may pay a higher rate than a comparable annuity that offers more liquidity.

If you take out more than the contract allows during the penalty period, the insurer will charge a penalty fee. These exit charges and their application vary widely from company to company. However, they often start at 7% to 10% of the excess withdrawal amount in the first year and decrease annually.

Some annuities allow you to give up with no penalty if you become completely incapacitated, are diagnosed with a terminal illness, or are admitted to a nursing home for an extended period during the term.

Understand the financial strength of life insurers

Life insurers that issue annuities are rated by AM Best on financial strength and solvency. The grades range from F to A++.

A lower rated insurer can sometimes pay a higher rate. For example, in the examples at the beginning of this article, the insurer rated A- pays the lower rate, while the one rated B++ pays the higher rate. But sometimes a higher rated company pays more or as much as a lower rated airline.

It is to some extent a matter of personal comfort. Some people only feel comfortable with insurers that get at least an A or A rating. Others may be more comfortable with lower-rated airlines. I recommend choosing companies with a minimum rating of B++ and avoiding those with a rating of B+ or lower.

Lesser-known (but top-notch) insurers often (but not always) pay higher rates than the biggest brands with more overhead and pricier advertising campaigns.

How to shop for the best deal

If you go to a local financial adviser or independent agent, they will likely only show you products from a few insurers, maybe just one. You usually only see the annuity products that he or she is used to presenting and that you want to buy.

When you work with a bank or broker-dealer, the product selection is usually even smaller. Their agents can only sell the limited number of annuity products that the bank or broker-dealer makes available to them.

In other words, buying an annuity from a local, face-to-face seller dramatically reduces your chances of getting the best interest rate.

When shopping online, you can compare annuities from dozens of insurers and make comparisons on rates and other features. In addition to my company, AnnuityAdvantage, there are several reputable websites.

With a rate comparison site, you can easily avoid bad deals and get the best rate from a solid insurer. There are a few words of warning, however. Just because a retirement agent has a website doesn’t mean they have the experience or ability to do business in every state. Look for a website where the agency is licensed in all states and represents a large number of insurance companies.

After reviewing the plans and making initial comparisons, you can speak to an agent, set your goals and see how the products available would match your needs. Also, ask about ongoing service after you buy the annuity. Long-term relationships are important.

Your services should not end with the sale of annuities. A good broker should conduct annual reviews; Inform customers of changes in AM Best ratings with the issuing insurance company; assist with beneficiary changes, death claims and annuity payments, if requested; and consult with the customer prior to the end of the original warranty period regarding extension options with the current insurance company or better rates with other companies. And you should be able to reach a live person on the phone at any time if you have any questions.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed, indexing and lifetime annuities. Ken is a nationally recognized pensions expert and author with numerous publications. A free interest rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356. There are no fees or charges for the services of the law firm; 100% of the client’s money goes to their pension to work for them.