If you want a guaranteed rate of return and don’t need your income until a later date, a fixed interest annuity might be for you. Interest rates are at the level they were in the 1950’s and this also has negatively affected certificates of deposit.
At some point in the future, the Federal Reserve will increase their rate and fixed interest products will follow suit. Here’s where tax deferral becomes attractive. For example, an interest rate of 5% equals a return of 6.67% for an individual in the 25% Federal tax bracket.
An objection I have heard for many years about annuities is that unlike CD’s, they are not FDIC insured. Annuities are protected by the claims paying ability of the insurer. Our autos, homes, businesses and liability are protected by insurance companies and it has never occurred to me to have our personal lines coverage protected by the FDIC.
Another objection is liquidity and the bottom-line is real simple: Don’t put money into an annuity if you plan to cash out in one or two years. Keep your money in short term funds.
Other than CD’s, however, there aren’t very many financial instruments that have the word guarantee included. If you paid $200,000 for your home in 2005, how much would it have sold for if you had to sell in 2010?
With stocks and bonds, the same concern applies. If you need to liquidate the equity, is there a guaranteed return? It may have increased or decreased by 15-20%. Does this mean you should avoid equities? Of course not! What it does mean is make sure your savings are in products appropriately suited for your risk tolerance.
In addition to the previously mentioned tax deferred status of annuities, avoidance of Probate is an excellent feature of annuities. The savings of some 2.5% on executor fees is quite nice not to mention assurance of privacy in settling your estate. You might remember Gladys Kravitz of “Bewitched” many years ago. The “nosey neighbor” prying into your personal financial affairs is just what you don’t need when a loved one dies.
Features to consider in a fixed interest annuity include the current and minimum guaranteed rate, withdrawal and surrender features, payout options and death benefit. Of course the financial strength of the carrier is very important.
Fixed interest annuities will probably be best suited for individuals who want to preserve assets, receive a guaranteed return and avoid the ups and downs of the market.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.
