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Annuity Learning Center

What is an Annuity?

An Annuity is a legal contract between you and an insurance company. You make a single premium payment or periodic payments over a period of time.

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CDs vs. Annuities PDF Print E-mail

Are low CD rates creating frustration and hurting your monthly income?

These are just a few of the factors to consider when making your selection between a CD and a Deferred Annuity.

For more information on the power of deferred growth.

  1. Why are some banks offering deferred annuities in lieu of CDs?
  2. Unlike CDs, Annuities are Taxed Deferred. At a 35% tax bracket, a 2% CD rate offers an after-tax return of 1.3%. Therefore, if your annuity return is just 3% deferred, your equivalent CD rate would need to be 5.71%.
  3. Consider this— a 10% Bonus Annuity with a 4% current rate of return offers a 14.4% first year return. In order for your bank to match this rate, it would need to pay you at least a 17% return on your initial investment. Today, the average CD rate is less than 2.5%.
  4. A Deferred Annuity provides you with access to funds should the need arise. Most companies will give you the flexibility to withdraw a portion of your deferred annuity's account value, usually 10% each year, without a company-imposed surrender charge. Withdrawals from Deferred Annuities can be made in response to a one-time cash need or set up systematically to respond to a continuous need. In fact, most Deferred Annuities offer the opportunity to systematically withdraw funds on a monthly, quarterly, semi-annual or annual basis.
  5.  Distribution Options at Maturity—
    When a CD reaches its maturity, you can take the CD's lump sum value in cash, renew the CD for the same or different maturity period, or examine other investment alternatives (such as a Deferred annuity). With a Deferred Annuity, you may elect to withdraw your money in a lump sum or select a lifetime income option, which will provide you with a consistent flow of income that you cannot outlive. Or, you can simply elect to let your funds accumulate until a need arises.
  6. There is a special class of Fixed Annuities called CD-Type Annuities. These annuities are different from typical Fixed Annuities because the period of the guaranteed interest rate is equal to the length of time that the surrender charge period exists. If the surrender charge falls off at the same time that the interest rate guarantee falls off, the investor can switch to another investment without paying a surrender charge (There are still tax implications.).