Why Consider High Yield Annuities

Why Consider High Yield Annuities

High-yield annuities will generally provide interest rates from a half point to two points better than the rates offered by CDs. This same difference in interest rates also exists between high-yield and regular fixed-yield annuity products.

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• The Promotional Interest Rate
• Bonus Interest Rates
• Watch out for Expenses
• It’s not just about the Yield
• Frequently Asked Questions

This seemingly small rate difference can translate into a significant amount of earnings over time but as with most everything in life, we don’t get many free lunches, if any. Meaning, if you desire to gain an advantage in one area of a financial product, you’ll typically have to sacrifice in another area. Although high-yield annuities are appealing at first glance because of their higher interest rates, it’s critically important to know more about what’s actually going on inside your annuity contract.

Four Critical Things to Look for in High-Yield Annuities:

The Promotional Interest Rate

Fortunately for investors, the annuity market has become incredibly competitive with insurance companies offering hundreds of products in order to compete for your hard-earned money. Insurance providers appear to be willing to offer a guaranteed high yield for the specific time period because they are ultimately counting on hanging on to your investment much longer.

This strategy allows them to invest funds in long-term bonds which translate into higher yields. Typically, a rate guarantee period will range from one year to as long as ten years. In most scenarios, the longer the rate guarantee period lasts, the higher the rate guarantee will be. In every case, however, it’s important to understand the fine print that is found in an annuity contract where a multi-year rate is being offered but generally only guaranteed for a limited time period. For instance, in some cases, you might see an annuity product being advertised with a 10-year rate of 4% but then also find that the rate guarantee period is only for three years.

Additionally, since the fixed rate is generally payable for a specific time period, it’s equally important to understand how the insurance company will go about adjusting the rates and what the minimum rate guarantee really is. Although it’s always in the best interest of the insurer to stay as competitive as possible – you can always transfer your funds from one annuity to another if you are not satisfied – so they will often time have to drop their rate below the market in order to make up for any losses that have resulted from the higher rate.

Finally, it’s critical that you shop for high annuities by comparing the fixed rate guaranteed against the minimum rate guarantee. Even if the initial fixed rate guaranteed is unfavorable, you may be better off searching for annuities that offer the greatest minimum rate guarantee – and don’t forget to consider annuities that have liberal surrender provisions.

Watch out for Bonus Rates

You’ll also want to keep an eye out for companies that offer bonus rates on larger deposits. These larger deposits generally add a half point to a full point to your annuity’s yield which will ultimately translate to a significant difference in the long-term accumulation of your account, Typically bonus points are not offered on deposits less than $50,000 or $100,000, dependent upon the provider offering them. Knowing this, if you are considering investing close to the bonus amount, you may want to hold off until you can accumulate the amount needed to take advantage of the bonus.

Watch out for Expenses

While shopping for a high-yield annuity, if you come across an offer that appears too good to be true, it probably is. In this situation, the first place to look is at the expenses. We know that charging surrender fees is a way the company can recoup the high yield costs, but companies will also cover annual expenses. All annuities have various expenses that are deducted from your account each year. These expenses are generally made up of mortality expenses and administrative fees. A high-yield annuity can be very enticing at first glance until you dig into the annual costs which can easily diminish the rates that enticed you in the first place.

It’s not just about the Yield

Certainly, all investors want as much return as possible for every dollar invested. But history tells us that if you want to get something that will positively affect your wealth status; you will typically have to give something in return. This is traditionally referred to as the risk-reward continuum. Investors can easily find some exceptional yields on annuities in the marketplace today but must dig down and consider the costs involved.

For example, a ten-year yield guaranteed may appear to be an attractive investment until you enter into a period of rising rates and then find yourself locked into a lower rate. In some cases, a very attractive promotional rate can lure an investor into some very unfavorable and rigid surrender rules.

The Bottom Line for Investors

High-yield annuities are an excellent alternative for risk-conscious investors who prefer not to completely give up a reasonable rate of return. But, as with almost any investment, it’s essential to comprehend everything possible concerning the advantage and disadvantages of the investment you are considering before making that initial deposit.