I would very much appreciate if someone could explain the "investment" benefits of a Single Premium Deferred Fixed Annuity. I know NOTHING about this type of investment plan, which my financial planner has suggested as a good investment with a guaranteed 3.40% interest rate for the 5 year term. I don't have warm fuzzies in regards to insurance companies, and I'm seeking educated guidance. I don't know what I don't know and I'm not even sure what questions I should be asking. Thanks in advance.

  • The most beneficial feature of this type of insurance product is the high commission the planner gets for selling it. If you trust this guy, you wouldn’t be coming here to get more information, he would have explained the features and benefits of the product he’s trying to sell you. It’s time for a new planner. (My humble opinion) Nov 18 '18 at 2:44
  • Joe, this sort of reminds me of the days I used to do IPOs. I couldn't get the good ones on my own but I could get them from the full service brokers who hit me with the full 2% commission when selling. So back to the question... It's a given that insurance products have a high commission. Let's remove that from the equation. If the OP wants a 5 year no risk investment and this annuity is paying 3.40% risk free, then what are the alternatives? The best FDIC 5 year CD that I see offers 3.15%. So ignoring the commission aspect, what currently offers better than 3.40% risk free? Nov 18 '18 at 3:19
  • It’s a deferred annuity, we don’t know the rest of the terms, just the 5 yr guarantee. He might never be able to access principal, but only get an annual payment once the product annuitizes. (But again, I don’t know the rest of the terms of this product) Nov 18 '18 at 4:07
  • Deferred means that there's no taxation during the existence of the contract. It would be helpful for the OP to spell out the details but in general, being a 5 year annuity means that he has full access to the money in 5 years. Prior to that, there's usually a declining early withdrawal penalty each year. Another issue is his age. Pre-59-1/2 withdrawals of interest may be subject to a 10% federal penalty. Assuming no such constrictions, what can he do to achieve a no risk return better than 3.40% ? Nov 18 '18 at 15:47

Your broker should have given you information about this product. In addition, the company's web site should have additional details and explanations, as will other company's web sites.

I don't know a thing about a Single Premium Deferred Fixed Annuity. But I do know a bit about variable annuities, which I have owned several at a time on and off for 15+ years. Yes, there's a hefty commission for the product but you shouldn't think of it in those terms. If there's something that the annuity offers that suits your needs, it's worth considering. If you can find something that offers more benefit without a significant amount of additional risk, take a pass on the annuity.

Due to the market slide that began in mid 2007, near the end of the year I cashed out of one variable annuity that had 5 years of nice gains. I found another one that offered a 6% guaranteed deferred growth which also paid 3% on the cash balance. I could have gone back into the sub accounts (market exposure) and done better but this was safe money so I was happy to collect 3% interest (nice when money market rates were under 1%) while the deferred side grew at 6% annually, increasing the annual withdrawal rate should I ever decide to turn the income stream on. If not, I can have money at any time with only taxes due on the interest.

The only catch was that the money had to remain there for 2 years to avoid penalty and that date has long since passed. I surely could have done much better with this money if it was in the market but I already have enough exposed there. Technically, it's in the general cash account but it's 'akin' to a 2 year CD at 3% that converted to a 3% money market after that.

The point of this is that it doesn't concern me what the insurance company is doing with my money or how much they are making with/from it. 3% interest with a 6% deferred growth suited my needs for this money.

I would suggest that you meet with insurance agents from other companies. I have always asked them about the last guy's recommendation and asked if they have something better. Each meeting increased my product understanding and after a few months, I was able to evaluate which recommendation was best suited for me - and that agent got my business.

Back to you. The questions that come to mind are:

  • Do they offer your product in shorter maturities and what are the rates?
  • Any interest enhancement benefits?
  • Any up front premium bonuses?
  • Guaranteed renewal at your rate?
  • Is the principal and interest fully available to you in 5 years (not subject to the 59-1/2 restriction)
  • What, if any, annual penalty is there for withdrawal of interest?
  • Does it offer an optional return-of-premium guarantee?
  • Does your annuity offer a tax-free exchange into other annuity products?
  • What are the Death Benefits (Full interest or principal only)?
  • Does it offer a penalty free withdrawal if disabled, confined to an extended care facility or terminal illness?
  • Bob - Thank you so much for your responses. All of this is extremely helpful.
    – NLSutton
    Nov 20 '18 at 12:44

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