FIXED ANNUITIES, CD & CD ANNUITIES
As a contract purchased from a life insurance company, fixed annuities provide a guaranteed, fixed rate of return for a specific period of time. Both the principal investment and the interest rate are guaranteed and are unaffected by fluctuations in the market. In simple terms, fixed annuities are a low risk way to earn money in a certain amount of time. A CD Annuity is an insurance hybrid product that mixes the long-term interest rate of a CD and a fixed annuity that guarantees a fixed rate for the contract term.
As with other annuities, the CD annuity (also known as a Multi-Year Guarantee Annuity) is an insurance hybrid product that mixes the long-term interest rate of a CD (certificate of deposit) and a fixed annuity. It’s a long-term, tax-deferred retirement savings vehicle that guarantees a fixed rate (usually 3-10%) for the entirety of the contract term (usually between 1-10 years). Multiple annuities can be laddered (similar to the way many people structure their CD savings) to create a stream of liquid funds at regular intervals. The interest a CD annuity earns often grows faster than a typical banking CD with the same interest rate. This type of annuity is attractive to investors who want the guaranteed interest rate of a long-term CD but don’t want to pay taxes on that interest every year – as with other annuity types, the interest earned is taxed only when withdrawals or income are generated. It’s important to note that, as with many investments, early withdrawals before age 59 ½ may be subject to federal tax penalty, and all withdrawals are subject to income tax. There are also surrender charges to consider for withdrawing more than the allowed percentage each year.
A CD is offered by a banking institution and insured by the FDIC up to $100,000 (for non-retirement accounts), but an annuity is offered by a life insurance company and covered by individual state reserves between $100,000-$300,000 (varies by state). CDs create taxable income every year – even if the CD is rolled over into a new CD at the end of its term, you’ll pay the taxes annually. A CD annuity, however, can be rolled over into another annuity without causing a tax event – you’ll pay taxes on any earnings created by the annuity when you make a withdrawal. Another big difference is the ability to make a withdrawal from a CD annuity without having to cash it out – a traditional CD has to be left alone until its term is up or you lose earnings and pay surrender charges to cash it out early.
Ideally, a fixed annuity is a long-term retirement investment tool. For the purposes of portfolio diversification, a fixed annuity can be a terrific value. It’s possible to stagger the renewal dates of multiple fixed annuities (similar to the way many use CDs) and have money become liquid (that means no surrender charges or penalties for withdrawals) on a regular basis. It’s important to note that, as with many investments, early withdrawals before age 59 ½ may be subject to federal tax penalty, and all withdrawals are subject to income tax. There are also surrender charges to consider for withdrawing more than the allowed percentage each year.
A fixed annuity is an asset with death benefit options – it bypasses probate and passes to directly your designated beneficiaries as outlined in your contract. Optional riders can be added, at an additional cost, to increase the payout amount to your beneficiaries. Whether you have minor children who aren’t ready to handle money, adult children who are a little too carefree to trust with a sum of money, or extended family, friends, or organizations you want to favor, you know your situation best. It’s comforting to have the ability to direct how and when your annuity will support the people you care about most.
Which Product is Best?
As an independent agency, we have access to essentially all products on the market. Purchasing an annuity is a big decision and FSG can help you to make sense of the jargon, understand the subtle differences between plans, and find the ideal products that best meet your needs and objectives.
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