With no certain end in sight for the world’s continuing low interest rate environment, annuities like all other financial instruments have less to offer than when rates are higher on the world stage. Annuities are best known for their income guarantees, however in recent years with financial instruments from banks lingering at all-time lows, annuities offering higher interest rates have risen to the forefront as an alternative to earning low interest on savings from banks.
Shopping for high annuity rates is now very much in vogue as more and more annuities are used by savers to keep their money safe and secure while earning considerably higher interest than what banks presently offer. Annuity rates and income payout rates are easily found online using the internet to comparison shop. Before you begin your annuity shopping quest, you may want to visit educational websites such as the National Association for Fixed Annuities (NAFA.com), Indexed Annuity Insights.com and AnnuityGuys.org where you can get annuity rates or annuity quotes online, with scores of educational annuity videos. This can help you gain the knowledge needed to become a savvy annuity rates shopper.
Unfortunately, it gets a bit confusing differentiating between annuity rates, income payout rates, minimum guarantee rates and income rider rates. Now, to make comparing annuities even more challenging, there are popular newer style fixed index annuity rates that are limited by spreads, caps, stacking, participation and minimum income floors.
It is important to have at least a cursory understanding of how annuities work so you can make sense of all the annuity speak that often leaves newbies to annuities, feeling a bit overwhelmed. Let’s tackle some annuity jargon that will help you level the playing field when you are comparison shopping for annuity rates or annuity income guarantees.
Here’s a basic list of terms and definitions that are often bantered around:
Allocations – various securities, insurance products, or other assets aggregated in a portfolio
Annuitization – when income is guaranteed by an insurance company in return for forfeiting principal/premium or/and account value over to the control of the insurance company with limited or no future access to funds by the client other than contractually guaranteed income
Bonus – extra money paid by any financial institution, typically to gain your business
Cash Account – where actual money is held with growth potential and withdrawal privileges
Contractual Guarantee – any financial contract guaranteeing growth of principal, income or some other monetary benefit
Fees – any charge against account value regardless of value’s growth or decline
Fixed Annuity – Any annuity that guarantees initial principal/premium and future account value having NO investment risk–offering various interest-earning strategies
Hybrid Annuity – is simply a fixed annuity offering both a specified rate of interest and one or more market linked index option(s)for greater potential interest earnings and a lifetime pay option or rider that does not force annuitization
Immediate Annuity – when income is guaranteed by an insurance company in return for a lump sum of principal/premium paid to the insurance company with limited or no future access to funds by the client other than a set contractually guaranteed income on fixed immediate annuities and a fluctuating lifetime income on variable immediate annuities
Income Account – a non-monetary annuity account that has contractually guaranteed growth to produce a minimum contractually guaranteed future income
Income Floor – the minimum contractually guaranteed income produced and used as a safety-net in annuities regardless of economic conditions
Investment(s) – are securities – non-insurance financial vehicles except for variable annuities and variable life insurance which are securities or used in a general sense as any allocation of money or assets for anticipation of an appreciating asset; for example – Balancing my investment(s) in stocks, bonds and insurance annuities has done well.
Investors – individuals, in general, allocating money into a portfolio of securities or non-security insurance products
Majority Control – maintaining ownership and access to about 90 percent of initial annuity principal/premium allocated to an annuity even in a worst case full surrender scenario; annuities have declining surrenders which increase majority control to 100 percent of initial principal/premium/account value at annuity maturity
Maturity – When annuity surrender charges or penalties end, at which time owners have full liquidity; insurers still must maintain all contractual obligations after maturity–lasting throughout the annuity owner’s lifetime
Portfolio – an aggregation of all assets held by an individual
Premium – money placed into insurance contracts
Principal – money placed into any financial instrument or any verifiable account value
Spread – any charge that is only invoked with a corresponding gain in account value
SIGA – State Insurance Guarantee Associations– vary in coverage with each state and are not to be confused with FDIC which has the backing of the federal government
Variable Annuity – Any annuity that does not guarantee the owner’s initial principal/premium or future account value while owner is living, and owners typically assume ALL market risk—typically offers various sub-account investment options, classified and regulated as insurance and a securities financial instrument, may offer various death benefits to offset market losses, not a MarketFree® Annuity
Still overwhelmed? You are not alone. Others that are new to understanding annuities have educated themselves to become astute at choosing the best annuities for their retirement’s success, and you can too!
Beware of educational free lunch and dinner seminars, and local financial gurus on TV and radio – most of these are pure sales hype! If you need professional help, avoid basic insurance agents. Choose a true fiduciary financial planner with a CFP or RICP credential that has extensive experience, adding annuities to retirement portfolios in a balanced way as an alternative asset class. Best wishes for your online annuity rates comparison shopping!