The average 5 year CD rate is 1.16% nationally and 1.34% in Connecticut. For years, insurance companies have been offering almost double the rates offered by banks. They offer the rates for fixed terms of 5 years using annuities. Many people are leery of annuities but fixed annuities with guaranteed rates for the entire term are nothing to be afraid of. Here are some of the more competitive offers currently.
One insurance carrier is currently offering a 6 year fixed rate at 3.15% for deposits under $100,000 and 3.25% for $100,000 and above. The plan comes with a 100% return of premium feature at any time, even if surrendered during the first year. If someone wants to ensure they receive the full interest credit, they must keep the money in the annuity for the full 6 year term. When the term ends, they walk away with the money. If they are going to take the money prior to the term ending, they either need to use the return of premium feature or surrender the product out right and incur the early surrender penalty.
A second offer at 3.5% fixed for 5 years is currently available. This option does not come with a return of premium feature so it is important that the money not be taken prior to the 5 year term ending.
Many people stay away from fixed annuities due to lack of understanding about how they work. Insurance companies have been forced to provide documents called “Statements of Understanding” for the potential buyers. The document lays out the terms and conditions of the plan in an easy to understand manner and should be review prior to making a purchase.
When using an annuity to secure higher interest rates, it is important to review the terms prior to purchase. Be careful to see if a first year bonus being used to make the rate look more attractive. Bonus rates only usually last for one year and then the rate will go down in years 2-5. Make sure that the annuity has the same level rate for the entire surrender period. It is also important to ensure that the contract allows 100% access to accumulated value after the term has ended.
If someone is younger than age 59, they need to take extra precautions when purchasing an annuity due to possible tax penalties associated with surrendering it prior to age 59 1/2.
When used correctly, fixed annuities offer a substantial advantage to consumers over CD’s.
Edward Crowe is the owner of Crowe & Associates. He spends most of his time advising brokers on strategies that will help them to provide more value to current and prospective clients. For additional information visit http://www.croweandassociates.com
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