Finding High Yield Annuities

In the last 30 years annuities have steadily risen in popularity to the extent that the marketplace is now flooded with annuity products all competing for the same investment dollars. That’s good news for you because with hundreds of life insurers vying for your deposit, you are almost assured of finding high yield annuities. The bad news is that there are hundreds of life insurers all offering a broad range of products which can make the search for the best yields extremely daunting. But not to worry, because finding the best yield may be just a few clicks of your mouse away.

It is important to first understand there’s more to fixed yield annuities than an interest rate. Not all fixed annuities are alike in the way they are constructed, and there are a few moving parts inside of an annuity contract that can complicate an otherwise easy “apples to apples” comparison. If your search was simply a matter of calling up the highest yielding annuities and comparing them side by side, you may be missing out on some very important aspects of the contract. With annuities, what you see may not necessarily be what you get in the long run.

High Yield Annuity Essentials

Taking the Bait

It is a very competitive field, made more so because of the transparency and reach that the Web provides for searching and information gathering. Annuity providers know they may have but one chance to get your attention, so many are willing to promote a very aggressive rate to lure you in. The rate you see is very real, meaning the provider will credit your account with the advertised rate. The problem, in many cases, is that the rate is only guaranteed for a year, after which it is likely to be adjusted downward. They may be willing to pay a high yield in the first year as a loss leader because they can make it up in subsequent years by crediting a lower rate.

It’s not really a bait-and-switch; rather it is a bait with a hook, because once you’re in the annuity contract, you’re not likely to leave. Yes, you can transfer your annuity to another annuity; however, your funds may be subject to a surrender fee when doing so. Why go through that aggravation when you can simply look beneath the hood to see what the minimum rate guarantee is, and also see what kind of formula they use when adjusting the rate. From a long term competitiveness standpoint, this is more important than what you earn on your contract with the first year rate.

Multi-Year Guarantee

Some annuity contracts are set up with multi-year rate guarantees. These offer even higher yields because the contract terms are designed to keep you in place longer. The difference between a one-year rate and a ten year rate can be as much as 3 percentage points! When a provider knows they will keep your money longer, they will be willing to pay a higher yield. And, that can be a win-win, if you understand the terms of the contract. Some annuities offer a multi-year rate, such as 5 years, but the actual guarantee is for 3 years. And, as with the high first year rate guarantee discussed above, it is important to know what the minimum rate guarantee is as well as the formula for the rate adjustment at the end of the guarantee period.

The big concern for multi-year rate guarantees is the direction of interest rates. If you think that rates are going to increase over the next few years, you may be better off going for the single year guarantee with a high minimum rate guarantee. If interest rates do increase, the provider will need to keep its adjusted rate competitive or risk losing your deposit.

Watch Out for Expenses

Some annuity providers are able to offer high yields and multi-year guarantees because they can make up their costs by charging higher expenses. In most fixed yield annuities, the contract expenses are limited to an administrative fee, a contract fee, and a mortality fee. There is not a lot wiggle room for inflating these expenses, but they can still differ by as much as a percentage point from one contract to the next.

The bigger expense to look for is in the withdrawal provision. Annuities do allow for monies to be withdrawn at any time, however, they limit the withdrawal to 10% of the account value by charging a surrender fee for any amount in excess. The fee can range from 5% to as high as 15%, but, typically, the fee declines by a point each year until the end of the surrender period which can last as long as 15 years.

So, here’s the deal. A provider may offer a very high yield and/or a long multi-year rate guarantee; however, they may also apply a much steeper surrender fee along with a longer surrender period. This way, they can recover some of cost of the high yield through excess withdrawal fees. You can’t really fault the provider for this as it seems like a reasonable trade-off for higher earnings. And, since an annuity is a long term investment, you aren’t likely to withdraw excess funds if you planned well.

Look for Break Points

Some annuity providers also kick in a bonus percentage for larger deposits. Break points for bonus yields don’t typically occur until the deposits reach upwards of $50,000 or $100,000, sometimes $250,000. But, if you are planning on splitting up your long term savings among different vehicles, you may want to consider going for an annuity break point. It may be worth it to combine your investments into one annuity if you are able to earn an extra percentage point. On $100,000 that not a small difference.

How to Find the Highest Yields

Armed with the high yield essentials, you can gain instant access to the vast marketplace of annuities by tapping into an annuity product aggregator. These are websites that compile all of the key data on annuity products and providers that enable you conduct side-by-side comparisons. You should be able to find the essential information such as the yield, the length of the guaranteed period, the minimum rate guarantee, the length of the surrender period, the surrender fee schedule, break points for bigger deposits along with all of the options the product offers. The key is to find the right balance of high yield with guarantees and flexibility (withdrawal provisions) that best matches your long term needs.

There are hundreds of annuity products, so you could wind up spending a lot of time and doing a lot of second guessing. One way to narrow the field quickly and eliminate second guessing is to restrict your search to only those companies that have earned the highest rating from the independent ratings agencies. This will narrow your choices significantly and ensure that your money is invested with the strongest and most financially stable life insurance companies. Annuities are among the safest investments you can own, but a little extra peace-of-mind may be worth it.