Who was the best baseball team in 2019? The Washington Nationals, of course, because they won the World Series. What's the best washing machine in 2020? Well, now it's a little more complicated because it depends on who you ask. What's the best fixed annuity? By the time you ask the question, the answer has probably changed. That's because insurance companies change rates and products, sometimes weekly. To boot, there are over 1,500 fixed annuities on the market.
Fixed annuities are retirement products, so the way to find the best value is to take a longer view. If you are not familiar with fixed annuities check out these articles first.
By the way, independent Insurance agents are annuity professionals. Their job is to simplify the process and help folks just like you make smart choices.
Why the Fixed Annuity Company Is Important
When you contribute to a fixed annuity, the insurance company puts the money into its general account. This account is largely a portfolio of corporate and government bonds. The interest the insurance company pays to you is based on what they earn from the portfolio. Here's why that's important. When you invest in bonds, the value can change up or down depending on interest rates. The insurance company guarantees your fixed annuity account value and rate of interest, regardless of how their bond portfolio performs. What that means is when you purchase a fixed annuity, you are getting the benefits of a large professionally managed bond portfolio without any investment risk. Insurance companies take some additional steps for indexed annuities, but the basic concept is the same.
The bad news? If the insurance company goes bankrupt your money can go with it. That's why it's important to buy a fixed annuity from a reputable and financially strong insurance company.
Fixed Annuity Company Ratings
Fixed annuities are long-term investments. You are going to want to know that the insurance company will be around as long as you are. Financial rating agencies like A.M. Best, Moody’s, S&P, Fitch, and others analyze life insurance companies. They publish financial strength ratings, which give their opinion of the company’s ability to pay policyholder obligations.
Each agency has its own methods, but the big picture is consistency. If all the agencies rate a company highly, it’s a good sign. While the rating agencies use different systems of measurement, all of them break down into the categories of high, medium, and low ability to meet policy holder obligations.
|Highest Ability To Meet Obligations||Medium Ability To Meet Obligations||Lowest Ability To Meet Obligations|
|A.M. Best||A++ To A-||B++ To B-||C++ To C-|
|Moody’s||Aaa To Aa||A To Baa||Ba To Caa|
|S&P||AAA To A||BBB To B||CCC To C|
|Fitch||AAA To AA-||A+ To BBB-||BB+ To CC|
Finding the Best Fixed Annuity Policy
There are 3 basic types of fixed annuities: immediate, or income annuities, multi-year guaranteed annuities (MYGAs), and fixed indexed annuities. Evaluating income annuities is the simplest. You'll want to choose a financially strong company that offers a competitive rate for the income option that you select.
MYGAs - These offer a guaranteed rate of interest, typically for 3, 5, 7 or 10 years. The surrender on the policy should not be longer than the interest rate guarantee period. That's important because when the guarantee period expires, the insurance company will offer a new rate. If the rate is competitive, fine. If not, you can make other arrangements.
Fixed indexed annuities - These offer interest credits that are based on the performance of a financial index. The S&P 500, Russell 1000 and Russell 3000 are commonly used. If the index goes down, you don't lose money, but you don't earn any interest credits. If the index goes up, you get a portion of the increase. The insurance company retains the rest.
Your portion is measured by a percentage of the increase, called a participation rate, or a maximum gain, called a cap. These rates are reset, usually each year. The renewal history is an indication of how the insurance company treats existing policyholders. Some companies tie very attractive caps and participation rates to the purchase of income riders.
Finding the Best Fixed Annuity Company
Life insurance companies tend to specialize in certain products. They often make decisions to be more competitive in certain areas and not in others. Larger companies with the highest financial strength ratings tend to be less competitive than smaller companies with lower ratings. Why? Because they can. Many consumers are willing to pay for the higher ratings.
The folks at annuityratewatch.com keep track of fixed annuities in the market. As of March 2, 2020, New York Life, which has the highest financial strength rating of A++ from A.M. Best, is offering a 3-year MYGA fixed annuity rate that is less than half of the rate offered by Western United. Western United is a much smaller company and is rated at B+ by A.M. Best. What is more important to you? The rate or the rating?
Another consideration is how much the company sells. That's an indication of what consumers think of the company and its products. New York Life was the 2nd largest seller of fixed annuities in 2019.
Does that mean you should buy from New York Life? No, the point is that you should be aware of the company’s financial ratings and their presence in the market. A professional independent insurance agent can help you weigh the options.
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Finding the Best Agent
Fixed annuities are sold by licensed insurance agents. Some agents, called career agents, can only sell the products of the company they represent. Other agents may work for banks and other financial institutions, and can sell many products. Independent insurance agents represent you and sell the products of many companies. Make sure your agent covers these topics with you:
- Surrender penalties - Make sure you know how long the surrender penalty period is. The surrender period for an MYGA should be the same as the rate guarantee. Generally, surrender periods beyond 10 years should be avoided.
- Market value adjustments (MVAs)- Your agent should cover any MVA provisions with you.
- Interest credits - Your agent should explain to you how you receive interest credits. Interest crediting for fixed indexed annuities can be very involved. Make sure your agent explains it clearly.
- Renewal history - Your agent should be able to tell you what the renewal rate history is for a fixed annuity, or indexed annuity, MYGA or otherwise. Renewal rates for fixed indexed products is especially important because of the longer surrender periods.
- Income options - If you are purchasing an income annuity or a guaranteed lifetime withdrawal benefit (GLWB) rider, make sure you know what the beneficiary provisions and fees are. GWLB riders are very complex. Make sure your agent covers the provisions and the impact of the fees on your account value.
- Financial strength - The financial strength of the company that you buy from is important. That said, companies that don't have top ratings often have more competitive offerings. Your agent should provide you with the company's ratings along with an explanation of them.
The Benefits of an Independent Insurance Agent
Fixed annuities can be an important part of your retirement plan. While they have many features and benefits, they are not for everyone. Annuities are complex, and searching through options can be confusing, time-consuming and frustrating. An independent insurance agent's role is to simplify the process. They offer the products of many different companies. They work for you, not the insurance company. They have the experience and knowledge to help you decide if a fixed annuity is right for you.
TrustedChoice.com Article | Reviewed by Jeffrey Green
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