In these days of historically low interest rates, savvy investors are shopping for financial products that offer an alternative to the meager interest on savings from banks. The annuity is financial product that offers income guarantees and finding one with the best interest rate(s) is a pursuit that can yield significant returns for the investor. Shopping for high annuity rates is now very much in vogue as more and more annuities are used by savers to keep their money safe and secure while earning considerably higher interest than what banks presently offer.
While annuity rates and income payout rates are available to the consumer, it is essential to an informed shopper. Understanding and differentiating between annuity rates, income payout rates, minimum guarantee rates, and income rider rates is required to make any quality product comparison. Emerging new annuities also use concepts such as spreads, caps, stacking, participation, and minimum income floors. All of this jargon is related to how the annuity works and understanding the language is part of the process to become an informed investor.
Terms and concepts include:
Allocations – the mix of various securities, insurance products, or other assets aggregated in a portfolio
Annuitization – when income is guaranteed by an insurance company in return for forfeiting principal/premium or/and account value over to the control of the insurance company with limited or no future access to funds by the client other than contractually guaranteed income
Bonus – extra money paid by any financial institution, typically to gain your business
Cash Account – where actual money is held with growth potential and withdrawal privileges
Contractual Guarantee – any financial contract guaranteeing growth of principal, income or some other monetary benefit
Fees – any charge against account value regardless of value’s growth or decline
Fixed Annuity – an annuity that guarantees initial principal/premium and future account value having no investment risk
Hybrid Annuity – a fixed annuity offering both a specified rate of interest and one or more market linked index option(s)for greater potential interest earnings and a lifetime pay option or rider that does not force annuitization
Immediate Annuity – an annuity with income guaranteed by an insurance company in return for a lump sum of principal/premium paid to the insurance company with limited or no future access to funds by the client other than a set contractually guaranteed income on fixed immediate annuities and a fluctuating lifetime income on variable immediate annuities
Income Account – a non-monetary annuity account that has contractually guaranteed growth to produce a minimum contractually guaranteed future income
Income Floor – the minimum contractually guaranteed income produced and used as a safety-net in annuities regardless of economic conditions
Majority Control – maintaining ownership and access to about 90 percent of initial annuity principal/premium allocated to an annuity even in a worst case full surrender scenario; annuities have declining surrenders which increase majority control to 100 percent of initial principal/premium/account value at annuity maturity
Maturity – the time at which the owners have full liquidity of an annuity
Portfolio – an aggregation of all assets held by an individual
Premium – money placed into insurance contracts
Principal – money placed into any financial instrument or any verifiable account value
Spread – any charge that is only invoked with a corresponding gain in account value
Variable Annuity – an annuity that does not guarantee the owner’s initial principal/premium or future account value while owner is living, and owners typically assume market risk
Understanding annuities requires ongoing research and a commitment to learning new concepts. The payoff is the added knowledge of being able to best select the financial product that fits your retirement planning needs.