Fixed Annuity Rates Explained
What is a fixed Annuity? It is a contract between the investor and the insurance company. The investor is then required to pay premium(s) to the insurer according the agreement in the contract for a specified period of time. The amount paid will then be accumulated and payment of such will be deferred in the future time guaranteeing the investor a reliable income during his lifetime. This is considered a tax deferred transaction. It means that as long as the investment is still accumulating interest and not yet converted into an actual income, it is still considered as a passive income thus, cannot be taxed.
Different financial institutions offer different rates. People are slowly getting educated regarding this matter. Now, investors are more prudent in choosing the institutions they want to invest with. The better fixed rates offers, the more investors it gains. The result is a better competitive rate available in the market today.
But how does the market determine the annuityrate? Well, there are several factors affecting such. These are the established investment performance of the institution, the interest rate environment and the period of the investment entered into by the owner.
These financial institutions can pay interest on your investments because primarily they are using your money to make more money. The bank uses its deposits to extend loans while investment house invest the deposits further for a bigger return of investment. Here, stability and outright knowledge of the financial market reflects stronger performance that transforms into a more competitive yield in their industry.
Another factor would be the interest rate environment. The volatile market affects how investment rate function. Thus it is very important to keep the interest rate stable otherwise it would affect the performance of loans and investment especially for long term plans. Thus, they need to make adjustments before it happens.
And the last factor applies to the period of the investment entered into by the owner. The length of time of the investment is probably one of the biggest factors to consider. Banks have a longer time to use your money thus they can afford to invest such in a riskier manner with a potential for a better return of investment. For the insurance companies, this may refer to a deferred fixed policy. The longer your money stays in the investment, the better interest rate you will get.
Different rates are offered depending of the transaction you entered into. Basic knowledge of this will determine suitable solutions for you. Financial managers for banks and insurance institutions are there to help you out. Then again, it’s your hard earned money you should be prudent in keeping it safe.
Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.