Because they typically offer higher fixed yields with the same principal guarantees, Fixed Annuities have become one of the better alternatives to bank CD's or low yielding bank savings accounts.
The major difference, of course, is the fact that insurance companies' back fixed annuities and the full faith and credit of the U.S. government (with limits) back CD's and bank savings.
When you purchase a Fixed Annuity, you are, in effect, investing in the general account of the insurance company. Therefore, the overall strength of the insurance company must be highly rated by the independent rating services, such as A.M. Best, Standard & Poor's, Duff & Phelps, Weiss Research or Moody's.
Choosing a Guarantee Period
Fixed Annuity Plans typically allow you to choose a one-year rate or a multi-year guarantee rate. All fixed annuity plans have a minimum, contractual guaranteed rates, usually 2.00% to 3.00%.
For example, ABC Life Company may offer a one-year rate of 7%. At the end of one-year (your policy anniversary) your account will then receive the "going rate" at the time, not to drop below the contractual minimum.
On the other hand, XYZ Life Company may offer a 6% rate guaranteed for 5 straight years.
Conservative Investment Approach
Fixed Annuity Plans typically appeal to investors who are conservative and like to know exactly what they are going to earn from one year to the next. Many investors will use Fixed Annuity Plans to ensure they have specific amount money at a future point in time without risk along the way.
There are many types of Fixed Annuities on the market and all vary in terms of yield, duration and contractual features or "bells & whistles." Such features may include convalescent or terminal illness waivers, 10 to 15% free annual withdrawal allowances, index options, interest rate bailout clauses, etc.
FIXED ANNUITY RATES CAN CHANGE DAILY
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Does a Fixed Annuity Really Make Sense? Do The Math!
1. $25,000 invested in a fully taxable investment at 7% would grow to $39,536 in ten years, and $62,524 in 20 years.
2. The same $25,000 invested in an annuity at 7% will be worth $49,179 (24% more) in ten years and $96,742 (55% more) in 20 years.
3. Now, let's say you decided to spend 7% of your accumulated value to live on. The taxable plan would pay $2,932 after tax and the annuity plan would pay $4,537 after tax.
YOU make the choice. Remember, tax deferred growth can equal more spendable income for you and your family.
How to Hedge against Equity Exposure using Fixed Annuities
Let's say you have $100,000 to invest, of which a certain amount is earmarked for equity based returns (stocks, growth funds, etc.)
You know that in 10 years, you must have at least the $100,000 you started with for an anticipated expense.
The hedging strategy would be to deposit $49,166 into equity based investments and the balance of $50,834 into a fixed, multi-year rate annuity at 7%.
At the end of 10 years, the $50,834 will be worth $100,000, even if the $49,166 dedicated to the equities market turned to zero. Unlikely as this may be.
Assuming the $49,166 invested in the equities market averaged 10%, your account would be worth $127,523, pre-tax. Add this to your fixed annuity value and you now have a total of $227,523, again, pre-tax.
Hedging your equity exposure with Fixed Annuities can be a very powerful investing technique and something you should investigate if you find yourself in a similar situation.
Action To Take
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Copyright © 1998
Fielder Financial Management, LTD.
All Rights Reserved.
Securities and investment advisory services offered
through Girard Securities, Inc. member FINRA, SIPC.
Fielder Financial Management, Ltd. not affiliated with Girard Securities, Inc. Mark Fielder, OSJ, Registered Principal. CA. Insurance Lic. # 0690576.