How to Rate Annuities
- 1). Understand how each type of annuity works. Comparing a fixed annuity to a variable or immediate annuity will not give you the right information to make a smart decision.
A fixed annuity offers a guaranteed rate of return that is adjusted annually. Your principal will not fluctuate and is guaranteed by the insurance company.
Variable annuities have mutual funds as subaccounts in the annuity account. The mutual funds will be allowed to grow tax-deferred. Your money will fluctuate according to the mutual fund fluctuations.
Index annuities are a hybrid between a fixed and variable annuity. They offer a minimum rate of return when a market index such as the S&P 500 is down but will give higher returns in years when the index is up.
Immediate annuities will start a regular payment for either your lifetime or a specified period. - 2). Examine the time frame of the annuity you are considering. This is easily compared through the surrender period and fees schedule.
Annuities (other than immediate annuities) are long-term investments. The surrender period refers to the length of time the insurance company expects you to keep your money in the annuity. If you withdraw the money before this period, you will be assessed a "surrender charge." Annuity time frames range from three to 15 years.
A shorter time frame allows you more immediate flexibility to change the annuity if you are displeased with its performance. Annuities of five to seven years are the most common. - 3). Review the surrender charges.
As discussed in Step 2, you will be assessed a surrender charge for ending the contract early or withdrawing money prematurely. Surrender charges vary from company to company and product to product. They are usually higher at the start of the contract and decrease with each year at the anniversary date. Surrender charges may be as high as 15 percent.
A common and highly accepted surrender charge schedule for a seven-year annuity---from year one to year eight---may look like this: 7 percent, 6 percent, 5 percent, 5 percent, 4 percent, 3 percent, 1 percent, 0 percent. - 4). Compare fees.
Fixed and equity index annuities don't show you the fees you pay to the company for the product, because you are being given a "net of fees" rate of return.
Variable annuities charge fees in the mutual fund subaccounts as well as annual fees to cover the risk of insurance, should you decide to annuitize the contract and take an immediate annuity at some point. Reasonable fees for a variable annuity should be less than 2.5 percent. If the annuity is in an individual retirement account, consider a self-directed IRA that will not charge the added fees. These fees are acceptable if you are getting tax-deferred growth on money that otherwise would be taxed annually. - 5). Research the insurance company offering the annuity. Insurance companies are rated by third-party companies such as Moody's or Standard & Poor's. The higher the rating, the more solvent the company is considered and the greater likelihood that it will have liquid resources to pay a high volume of benefit claims at once, if necessary, without placing the overall assets at risk.
Companies rated AAA, AA, A are considered to be the strongest.
