Are you considering investment in a deferred annuity for use in your retirement years, something to protect y0u from outliving your money? Before your select any annuity, you need to check out the annuity company renewal rate history. Two different annuity companies offering similar products may provide very different annuity rates over time because of the way they invest and calculate renewal rates.
Note that any annuity company is under the rule of the state's department of insurance. This is unlike the regulations of variable annuities, which are securities. In the case of fixed annuities, these regulations restrict the annuity company options for investment to ensure that it can fulfill its fixed annuity obligations. The laws covering investment for any annuity company ensures that your company offering the product invests in rather mundane investments, primarily fixed income instruments. However, one annuity company may make a "bet" on long term rates and buy long term binds while another may opt for a short term strategy, forecasting that rates will rise. One annuity company will be more correct in their forecast and likely be able to credit better renewal rates.
When researching potential purchases at a deferred annuity company you might come across a couple of companies that offer the same attractive features. Both contracts will has got the same initial interest rate, identical guaranteed rates (i.e. the lowest possible rate), the same surrender charge schedule, and finally identical withdrawal features. Nonetheless, once the initial rate period expired, each company will be liberated to set a renewal rate with its own investment discretion. You need to understand the standards a company will consider ahead of setting the new rate.
The earnings that the annuity company obtains from its bond profile depend on the quality of the bonds (e.g. AA vs BB) and their average maturity. These two factors are related to risk and, for that reason, affect the yield. The general rule is that greater risk compatible higher yield.
In most cases, the better the bond quality, the lower the potential risk of default and the lower the rate the annuity company will earn. Yet another factor that impacts danger is time. Bonds with a extended maturity period usually produce more than bonds with short maturity periods. One can receive information on the quality and duration of the text portfolio held by the annuity company by asking for it. However, we highly recommend that you ask your agnet for a "vital signs" report. These excellent reports show the details of the annuity company investment portfolio in clear fashion and also the "comdex rating" (anything 80 or better is a solid annuity company).
Annuity companies with portfolios carrying greater risk obtain higher yields so long as the risk they take does not entail any defaults. The insurance company that gets a higher yield can afford to pay more overhead, offer better results on annuities, or keep the higher profits.
For instance we can think about two annuity companies with bond portfolios that have different average maturities however offering the same deferred annuity in all other respects. We can hypothetically think that both yield 5% and other things are usually equal.
The table beneath illustrates that annuity company A, that owns bonds with longer maturity, will be trapped in the event that interest rates go up and can only offer a 5% renewal rate. However, if interest rates fall, it could easily maintain the 5% payout. Company N, which has short maturity securities, must necessarily buy to be able to replenish its portfolio as bonds mature. The newest rate it offers will reflect the particular prevailing interest rates at the time of renewal. This may either be beneficial or not with regards to the direction in which interest rates move. So these internal annuity company decisions will have a big impact on the interest rate they pay you.
|Annuity Company A||Annuity Company B|
|Average Bond Maturity||15 yrs||8 yrs|
|Renewal rate under rising prevailing rates||Selling would cause loss of fund's value - offer 5% again||Almost matured –must buy and offer higher rate|
|Renewal rate under falling prevailing rates||No need to sell , offer 5% again||Almost matured - must buy and offer lower rate|