Paclean & Sweep Investment

Over the years the debate over the relative safety of mutual funds versus variable annuities has come and gone with nothing in the way of any real consensus winner. They both came on the scene at roughly the same time, surged in popularity together during the raging stock markets of the 80’ and 90’s, and proliferated to the point of saturation well into the early 2000’s. All things being equal, they both offer investors the opportunity to participate in the markets with relative safety and equal potential for upside growth. In either case, investors can achieve a level of diversification within professionally managed portfolios that can reduce the risk of stock market investing. In that regard, can one actually be safer than another?  In a word, yes.

If, by “safer”, we are referring to the possibility of principal loss, both types of investments entail market risk. Both invest in portfolios of securities that can either appreciate or decline in value. But, if you consider a standard variable annuity contract, there is at least one safety feature that you won’t find in a mutual fund and that is the guaranteed death benefit.  The death benefit affords the variable annuity investor one layer of protection that the mutual fund doesn’t offer and that is the guaranteed return of the investor’s principal investment.  While some variable annuity critics may try to belittle that benefit as inconsequential, they might ask those mutual fund investors who were unfortunate enough to die during the worst of the market decline in 2008.  At the very least, variable annuity investors can assure their surviving families of greater financial security even in the face severe market declines.

It has only been in recent years that variable annuity providers have upped the ante for investment safety by adding rider options that go even further to protect the principal as well as the gains in the account value.  And, for the increasing number of people who are concerned with outliving their income sources, the riders will also guarantee their income from a variable annuity.  Practically speaking, it doesn’t get much safer than that. While they do come at a cost, these riders provide the ultimate peace-of-mind that one doesn’t usually find in investments that also allow for unlimited upside growth.

All Gain and No Pain

The guaranteed account value rider (GAV) enables variable annuity investors to enjoy the gains in their account values while riding out the market swings.  Essentially, the rider guarantees a minimum amount of growth of the principal amount regardless of market declines. And, if the account values do appreciate over time, the rider provides a “step-up” that enables the investor to reset the principal amount to the higher account value.

No Account Gain? No Problem

The guaranteed minimum income benefit (GMIB) addresses any concern an investor might have over the possibility of having to take a smaller income as a result of declining market values.  The rider ensures that, during the accumulation phase, the account values will achieve a minimum amount of growth. And, at the time of annuitization, the income payment will be based on the greater of the minimum accumulation amount, the actual account value, or the highest account value level at previous anniversary date.

No Account Balance? No Problem

The living withdrawal benefit (LWB) essentially turns a variable annuity into a bottomless pit of withdrawals regardless of whether or not there are funds left in the account. When the rider is exercised, the withdrawal rate is set based on a percentage of the account value which can be the actual value or a guaranteed account value based on a minimum growth, whichever is higher.  Even after withdrawals begin, the account value can be “stepped up” if, as a result of market growth, it increases above the base account value. This would result in an upward adjustment of the withdrawal amount based on the same percentage applied to the higher account value.

Summary

The addition of these variable annuity riders essentially shuts the door on the “safer” debate. It’s not even a fair fight. However, they don’t come without a cost.  To add one of these riders an additional fee in the range of .5% to 1.2% will be deducted annually from the account values.  This on top of the average annual fees of 1.5% to 2% for standard variable annuity contracts. So, for the absolute peace-of-mind that can be attained alongside the upside growth potential, an investor will pay as much 3% of account values each year.  With over 60% of Baby Boomers lying awake wondering if they will outlive their income, these types of guarantees may be priceless.

One important caveat: Guarantees are only as solid as the companies that back them. If you are guaranteed a minimum income for a lifetime that may last 30 years, it would be extremely important to make sure you are working with a company that will be around at least as long. Life insurance companies are considered to be the strongest and most stable of financial institutions, but, with so much at stake, why not work with the strongest? Companies that have earned the highest ratings (A+ or better from A.M. Best or AAA from Standard & Poor’s) are deemed to have the capability of weathering even the most treacherous economic storms. If you really want peace-of-mind, stick with quality.

It seems almost inconceivable that, not very long ago, we managed to get through life without the Internet. One thing for certain, when we were left to our own devices to shop, compare and investigate products, we were not as efficient, nor were we as well informed as we are now in the Web-wired world. Financial products are especially bewildering products to shop for as much for their complexity as for the vastness of the financial universe. And, arguably, there is no more complex financial instrument with as vast a selection than an annuity. Without the Internet, finding the best annuity rates was as difficult as finding a needle in a haystack. Now, finding the best annuity rates online can be done in just a few clicks of the mouse.

Although the Internet has shortened the distance between consumers and the best selection of annuities, it is important not to have any illusion about the difficulties that remain even with the online tools that are available. It doesn’t change the fact that annuities are still complex vehicles, and that there is a vast selection from which to choose the right one for you. It is still vital that, before you try to narrow down your choices, you do your homework in order to understand how to recognize when you have found the best annuity rate for your circumstance.

Know Your Annuity

The most essential knowledge you can have going into a search for annuity rates is just what type of annuity you need for your specific financial objectives. Within the universe of annuities that are many apples and oranges and other varieties that perform very differently. It is critical that you first have a clear understanding of your particular needs and the objectives you want to achieve.

Immediate Income Need:

Annuities have been used throughout time for providing a stream of income that is guaranteed for life or for some specified period of time. The current nomenclature for these types of annuities is “immediate annuities” based on the fact that, once a deposit has been made with a life insurance company, the income can begin immediately. The amount of income received is determined by calculating a payout amount which is derived from the length of the payout period, the total amount of the annuity deposit, and an interest rate that is fixed for the term of the annuity.

The key factor in the equation is the interest rate which will vary from one annuity provider to the next. Generally, when searching for immediate annuity rates, you won’t see the actual interest rate; rather, you will only see the payout amount that the interest rate will generate. For comparisons sake then, the higher the payout amount, the higher the interest rate that is being applied.

Accumulation for Future Income Need:

If your need for income can be deferred into the future, you can still use an annuity to accumulate the capital you will ultimately use for an immediate annuity. A deferred annuity enables you to accumulate funds on a tax-deferred basis which will allow them to grow faster than if they accumulated within a taxable savings vehicle. The additional tax advantage of using a deferred annuity is that, when you are ready to convert your accumulated funds to an immediate annuity, there is no tax consequence – your funds will continue to accumulate tax deferred until they are received as income.

As with any accumulation vehicle, the rate of return, or interest rate, is a critical factor for ensuring that your funds are working as hard as possible within your risk constraints. Obviously, the higher the credited interest rate is, the harder your funds will work. When comparing deferred annuity interest rates you will be comparing the actual rate of interest which, again, will vary from one provider to the next.

There More to the Interest Rate Story

If it were as simple as comparing the stated interest rates side-by-side, this article could end right here. Unfortunately, the stated interest rate is only a small part of the story. Beneath the surface, you will find several different ways that interest rates are applied. Some are guaranteed for a certain number of years. Some are renewable annually. Some offer a high “teaser rate” which can drop precipitously after a year to a lower, non-competitive rate. Sometimes there is a bonus rate that is applied based on the size of your deposit. When an interest rate guarantee expires, a new rate is credited, which can be higher or lower than your initial rate. Most annuity contracts include a minimum rate guarantee which prevents the rate from dropping below a specified floor. For comparison purposes, it is important to consider all of the factors to ensure the best long term performance of your annuity.

The other key consideration is the flexibility of the surrender provision which determines how much of your funds are available for withdrawal without penalty. In some cases, an annuity that credits a highly competitive rate of interest may have a much more restrictive surrender provision – either higher surrender penalties or a longer surrender period, or both. And, when comparing high interest rate annuities, be sure to compare annuity expenses, as annuity providers may sometimes try to offset the cost of a high rate of interest with higher expenses.

Quality is as Important as Quantity

Comparing interest rates and rate guarantees, while important, should be done only after you have narrowed your selection of annuity providers based on their financial strength and quality. By focusing only the highest rated annuity providers, you will quickly narrow your choices from hundreds down to a few dozen. The availability of rate comparisons online has made the entire field of annuity providers extremely competitive, so you are likely to find the best annuity rates even among the more highly rated companies.

The importance of choosing quality in an annuity cannot be understated as all of the guarantees of an annuity are only as sound as the financial strength and integrity of the company that backs them. Although annuities are considered to be among the safest of all savings vehicles, there is little reason to chase after a high interest rate from a lower rated company when there are so many competitive rates being offered by the top companies. It is strongly recommended that you confine your search to those companies rated A+ or better by A.M. Best or AAA by Standard & Poor’s.

Summary

Armed with the knowledge of which annuity fits your needs, and how to dissect the interest rates and rate guarantees, it is just a matter of logging on, and narrowing your choices. By no means should you expect the task of finding the best annuity rates online to be without challenges. The annuity rate search sites do a great job of facilitating your search, and providing you with essential information for comparison purposes. At some point, it is advisable to seek the guidance of a trusted financial professional who can answer all of your questions and ensure that your ultimate choice best suits your needs.