How do you know what to look for in a fixed annuity? Here are some key factors to consider:
Interest Rates
A typical fixed annuity offers two different rates — a guaranteed minimum rate and a current rate. The guarantee assures that you will never earn a lower interest rate than that base-level amount. The current rate is typically higher, and will vary based on market conditions.
Guarantee Periods
The interest rate you earned in a fixed annuity is guaranteed for a set period of time. Rates can be adjusted monthly, quarterly, annually, or less frequently. Be sure you are aware of how long you can expect your annuity to earn the current stated rate. Guarantees are based upon the claims-paying ability of the insurer.
Insurance Carriers
Any guarantees associated with your fixed annuity are backed by the claims-paying ability of the underlying insurance company that issues the annuity. You want to be certain that the company issuing your contract is a reputable firm with a long record of reliability.
Credit Ratings
Insurance companies that issue fixed annuities receive ratings from independent organizations on their claims-paying ability. Be sure you choose an insurer that has received one of the highest ratings.
Five different agencies rate the quality of insurance companies, which provides a sense of their ability to pay claims. Here is a sample of their ratings.
| Insurance Ratings |
| Ranking |
A.M. Best |
Duff & Phelps |
Moody's |
Standard & Poor's |
Weiss |
| High Quality |
A++ to A- |
AAA to AA- |
Aaa to Aa3 |
AAA to AA- |
A+ to B+ |
| Medium Quality |
B++ to B- |
A+ to BBB+ |
A1 to Baa1 |
A+ to BBB+ |
B to C |
| Low Quality |
C++ and lower |
BBB and lower |
Baa2 and lower |
BBB and lower |
C- and lower |
Surrender Schedules
Fixed annuities generally come with surrender schedules. That means a percentage of your account's value will be surrendered if you withdraw funds within the first few years of the contract. In some cases, partial surrenders are possible without any surrender charges if certain conditions are met. Check the flexibility available in the fixed annuity contracts you consider.
Market Value Adjustments (MVA)
Determine whether a Market Value Adjustment (MVA) applies to your fixed annuity contract. MVAs can affect the value of your account if you need to make withdrawals prior to the end of the guaranteed period of your contract.
In a declining interest rate environment, if you cash in your annuity prior to completing your surrender period, you will receive a positive adjustment to your surrender value. In a rising interest rate environment, if you cash in your annuity prior to completing your surrender period, you will receive a negative adjustment to your surrender value. Please keep in mind, the market value adjustment is in addition to the surrender charges you will incur for cashing
in your annuity prior to completing your surrender period.
