This blog is intended to explain how interest is earned in two types of annuities, as well as explain how surrender charges and withdrawals affect your projected accumulated values.

Interest rates

Fixed Type Annuities

When a “Fixed Type” annuity policy is issued, the insurance company sets the first year interest rate. This rate is guaranteed for the first year of the policy and is referred to as the “current rate”. These annuities also have a “base rate”, this is the rate the insurance company projects it will pay in the second year and on.

The difference between the current rate and the base rate is the “bonus rate”.

Example: 10.25% current rate (first year return), 4.25% rate years 2-6 (base rate). This product has a first year bonus rate of 6%.

CD Type Annuities

When a “CD Type” annuity policy is issued, the insurance company guarantees a fixed rate of return for a certain period of time. These annuities are more like a CD issued by a bank or like institution. Annuities can be a better choice when considering the avoidance of probate and deferring taxes.

Example: 5.00% rate guaranteed for 5 years.

Surrender Charges, Withdrawal Charges

Surrender charges and withdrawal charges are penalties assessed for “cashing out” your annuity before it has matured.

Example: You purchase a 5 year annuity with the following surrender charges (penalties) per year would apply: Yr.1- 5%, Yr. 2- 4%,Yr. 3- 3%, Yr. 4- 2%, Yr. 5-1%.

If you were to surrender your annuity before the end of the 5^th year the previous penalties would be assessed. Annuities are designed for the purchaser to keep the annuity till the end of the defined period. If you were to “cash out” the annuity before the end of this period your projected accumulation value calculations would not meet your expectations due to the fact that a penalty was assessed when you “cashed out”.

Most annuities will allow you to withdraw money without incurring a surrender charge penalty. Most, if not all Fixed and CD type annuities allow for an interest withdrawal or 10% of the account value per year with no penalty.

Make sure you know how the withdrawal or surrender charges apply to your annuity before you purchase it to save yourself unnecessary expenses.