Since they reached their peak in popularity back in the high interest rate days of the 1980’s, the number of deferred annuities on the market have proliferated creating, at best, a seemingly unlimited number of choices, and, at worst, a tremendous about of confusion. Wading through the hundreds of different deferred annuity products is, for most people, a daunting task, at best. If you are wondering how to find the best deferred annuities, use this guide to help save you time and frustration.
Key Characteristics of the Best Deferred Annuities
The deferred annuity market is constantly changing so it may never be possible to know if you have found the very best one. But, by applying some key criteria, you can easily narrow down the choices to include only those annuities that might rank on most people’s top ten list, which is about as good as it can get. Here is a list of the most important criteria for finding the best deferred annuity:
Rates that Make You Smile
Deferred annuity rates are very competitive from one product to the next, but, generally, their rates are a bit higher than other fixed yield vehicles such as bank CDs. So, if you have decided to invest in a deferred annuity over a CD, that alone should make you smile. But, if you are on the hunt to find the best interest rate available on a deferred annuity, you may be in for a little work.
Annuity interest rates can be searched and compared fairly easily on the internet. Once there, it is important to determine whether or not you are comparing apples and apples. Interest rates will vary depending on a number of factors such as the length of the surrender period or guarantee period. Typically the longer the rate guaranteed period, the higher the interest rate. Annuities with higher rates tend to have longer surrender periods, so all factors need to be weighed.
Also, many deferred annuities offer a bonus rate which is usually only applicable in the first year. It is important to read the fine print to see how the rate is adjusted after that. The same with rate guarantee periods. A high rate may be guaranteed for a few years, but then it will be adjusted downward. You need to know how that adjustment is determined.
Depending on how all of the factors weigh out, the better annuity may be the one with the slightly lower rate, but longer guarantee period, with a higher minimum rate guarantee and a reasonable surrender period. To find the best deferred annuities all factors need to be considered.
Financial Strength that Helps You Sleep
The highest interest rate in the world could have dubious value, if it is credited by a life insurance company deemed to have potentially serious financial problems in the future. The extra half of a percentage point is never worth the loss of sleep that would bring. Annuities are contracts between individuals and life insurance companies with a promise to deliver on several guarantees such as a return of principle and a minimum rate of interest. The security of that promise rests almost exclusively on the financial capabilities of the life insurance company.
While the life insurance industry is solid as a whole, as compared to other financial institutions, only the strongest companies will be able to weather the worst of economic storms, at least according to the independent rating firms such as A.M. Best, Standard & Poor’s and Moody’s. Essentially, any rating less than an ‘A’ is considered suspect by all three. With dozens of companies earning better than an ‘A’ rating it makes almost no sense not to focus your search on the upper tier of companies. Commons sense will tell you that the best deferred annuities are the ones that are best positioned to deliver on their promise.
Prioritize Your Search
With these two key criteria as your starting point, the search for the best deferred annuities becomes more streamlined. Starting with the financial quality of the issuing companies, you should be able to narrow your choices instantly. The higher your financial quality standard is the more narrow the field. Start with companies that are ‘A’ rated or better. You will find that, by the time you select out all of the companies except those with A+ (A.M. Best) or AA (Moody’s, S & P), you will still have more than thirty companies from which to choose.
Moving to the rates, you can compare them side-by-side using the key factors: Initial rate guarantee, length of guarantee period, minimum rate guarantee. You can also add in the bonus rate, but that should be considered after comparing the first three factors.
Once you have narrowed the field to ten or less, you can then start to peer into some of the other features such as their surrender period and fees. While this may not be a concern for long term investors, the notion of having greater access to funds increases the “peace-of-mind” quotient. So, those annuities with shorter surrender periods or lower surrender fees may move them up in your ranking. It’s not uncommon for deferred annuities with shorter surrender periods to have lower initial rate or minimum rate guarantees as an offset.
How often do we actually find the best of anything? The “best” is a really a subjective measure, but, for each of us individually, it is based on some very specific criteria that guides us in our search. Finding the best deferred annuities is no different. The more you know about your own financial needs, preferences and priorities, the better positioned you will to match yourself with the best annuity for you.