When I think of a safe place to put my money, I immediately think of a bank.  Most people I speak with would probably name a bank as the safest place.  Banks tend to be pretty safe and have the FDIC backing for deposits up to $250,000.    With that being said over 100 banks have failed this year.   If you compare that to life insurance companies, you will find that there have been no failures during that period.   Life insurance companies that issue annuity contracts have very stringent reserve requirements and have reinsurance to further backstop them.   Obviously, the higher the rating they receive from the financial ratings services the better.

We get questions about bank CD’s vs fixed annuities all the time.    They both are very safe investments, that are perfect for safe money.   The main differences, are that CD’s gains are taxable every year and fixed annuities are tax deferred.    If you pulled the gains out of the fixed annuity then the gain would be taxable too.  With a fixed annuity though, you have the ability for the gains to compound and you will not receive a 1099 then.   If a CD and an annuity have the same interest rate, the annuity will grow more with the compounding deferred interest.  Both CD’s and annuities have different term lengths that consumers can select.  For example, a 3 year year, a 5 year, and a 10 year term.   Generally the longer you lock in, the better rate of interest you can expect to earn.

A very popular product in this volatile market are fixed deferred annuities. These are insurance contracts that pay a guaranteed interest rate on the money deposited and grows on a tax deferred basis. Most companies have different break points and surrender periods. For example, the longer you keep your money with the life insurance company in the annuity, the higher interest rate you will receive. They also have bands that pay at higher rates depending on the deposit amount. For example, a higher interest rate might be credited to any deposit above $100,000. The different surrender periods are the periods where there is a penalty to move your money from that company to another. The surrender charge and period will decrease the longer the contract is in force and will eventually go down to 0%. It is just important to understand how many years before the annuity gets to 0%.

We always look at products for our client that have suitable time horizons for their money. For example, if the client is going to need the money in five years, then they shouldn’t buy an annuity with a ten year surrender period. On the other hand, if the client won’t need the money in five years and can wait ten, then there can be a higher with that trade off. It is also important to select a company that has a high financial rating. Obviously, it is important to know the company will take good care of your money. Look for an A rating or better with a company if you are looking at annuities. For a free analysis of your situation and what products are available please email vince@paramountlifeinsurance.com.