What Do I Need to Know About Fixed Index Annuity Rates? - Make Money Online

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What Do I Need to Know About Fixed Index Annuity Rates?

An essential step in retirement planning is learning about the variety of financial products available to you and how those products fit your financial goals. The more you know, the better the chances for success. For example, annuities are a financial product commonly misunderstood by many individual investors. Annuity contracts can seem complex and, in turn, investors may shy away from them. However, while there are many choices when it comes to purchasing an annuity, the basic functionality an annuity can be understood through some basic math and by asking the right questions. With this information, you can intelligently determine if and when an annuity is right for you.

Understanding how annuity contracts function is critical to ensure you purchase the product that best fits your needs. A poorly planned purchase will not help you reach your goals and, in fact, could result in financial disappointment resulting in poor growth or even inadequate retirement income. The contract terms of an annuity will generally reference the following:

1. Potential for growth (and/or minimum interest rates). This rate is the amount credited to your annuity value by the terms of the contract. For example, a fixed annuity with a 2-percent rate of growth means that one year after you purchase a $100K annuity, your balance should be $102K. Essentially, you put your money into the annuity for a certain amount of time in exchange for a fixed rate of interest or potential for additional interest growth.

2. Income rider growth rate. This is an option that you can purchase with an additional annual premium to modify the annuity’s contractual terms. The income rider growth rate is not the rate your annuity’s cash value grows by, but a formulaic number that the insurance company will use to calculate your payout. This number is not available as cash to withdraw in a lump sum, rather, it’s designed increase the amount of income you receive once you start drawing guaranteed lifetime income from the annuity. 

3. Income rider payout rate. This rate is a percentage of the total value of your annuity income account calculation that becomes your regular (usually monthly) payout amount you will receive contractually guaranteed for life, even if your cash account is expended.

Each contract will vary and an understanding of how these various rate factors affect your financial situation provides a road map for making the best annuity decisions for you. Here’s an example to illustrate how these rates work within an annuity:

An annuity from Insurance Company A has an income rider that increases by 5 percent compounding until you start to convert your annuity contract into a series of periodic income payments. If your annuity premium was $300,000 and you want income from it to begin in five years, the income value would have increased to $364,562. This amount is not available for cash withdrawal, it is only used to figure your monthly payout amount.

Insurance Company B has an income rider that increases by 6 percent compounding. If we started this annuity with the same $300,000, the value after the same five years would be $378,743.

Which contract pays you the most? That is determined by the payout rate.

If Company A with a value of $364,562 has a payout rate of 5 percent, the resulting annual payment would be $18,228, or $1,519 per month.

Now Company B with its value of $378,743 has a payout rate of 4.5 percent, meaning the payment would end up being $17,043 per year, or $1,420 per month.

Understanding how the rates work together is critical for selecting an annuity that works for your situation. For many folks, the rate of net cash flow from the annuity is the most critical consideration.

Rate of net cash flow the actual money you receive from the annuity on a regular basis. It is the “cash in hand” number and this helps answer the question of which annuity works best for your situation. Cash flow rate is a simple calculation of the annual payments divided by the original investment. 

In the earlier example, Insurance Company A pays $18,228 per year with a premium of $300,000. Using the cash flow calculation, you divide $18,228 by $300,000. The result is 0.06 or 6 percent. The net lifetime guaranteed cash flow from each original dollar is 6 percent.

By contrast Company B promised to pay $17,043. By doing the same math, $17,043 divided by $300,000 is 0.056, or 5.6 percent net cash flow on each original dollar.

Understanding the basic math concepts bundled within an annuity can help you make an informed retirement decision about the best fixed index annuity to reach your financial goals. As with all investments, the more you know about any financial product the better decisions you can make. In many cases, an annuity is the preferred product to provide the predictable and steady income you need or steady growth of your cash value account with a high degree of safety.
What Do I Need to Know About Fixed Index Annuity Rates? What Do I Need to Know About Fixed Index Annuity Rates? Reviewed by Parvesh Bravo on 9:15 PM Rating: 5

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