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Frequently Asked Questions |
| Fixed Rate Annuity Questions |
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| How are interest rates set by the insurance company? |
Credited rate analysis in the industry is not an exact science. There are many factors considered when determining credited interest rates:
- The company’s net earnings rate expected (the gross earnings rate less investment expenses) on the portfolio of assets supporting the product;
- The net earnings rate on new money being invested in that portfolio of assets supporting the product;
- Credited rate methodology, i.e., new money vs. portfolio approach;
- The desired interest margin, which is the difference between the company’s net earnings rate and the credited interest rate, to support the product pricing;
- Actual vs. assumed experience of other factors, such as persistency, mortality, and expenses;
- Credited interest rates on other products within the company and by the competition;
- Whether the current interest rate is indexed or declared, and how often it’s subject to change;
- The “floor” guaranteed interest rate on the product;
- The products’ loading structure (front-load vs. back-end load);
- The level of risk associated with the product: investment risks, pricing assumptions, adverse deviation risks, (when prices soar due to unpredictable adversities such as an epidemic or severe inflation) and business risks.
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| What is the initial interest rate and how long is it guaranteed? |
| The “initial” interest rate is applied to the first deposit into a fixed deferred annuity. The annuity contract will specify how long the initial interest rate is guaranteed (often one year for traditional fixed annuities). |
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| Does the initial rate include a bonus? |
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Some annuities offer a higher first-year interest rate that is guaranteed for one year. The “base rate” is the interest rate that the company projects it will pay in the second year and thereafter, but is NOT guaranteed in most cases. The difference between the actual rate in the first year and the projected base rate is the bonus rate. Quite often the “renewal rate” that the company declares on each contract anniversary from the second year and beyond is different than the projected base rate.
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| What is the guaranteed minimum rate? |
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Most, if not all, fixed annuities offer a minimum guaranteed interest rate. After the initial interest rate guarantee expires, the insurance company declares a renewal rate. The renewal rate will often reflect the interest rate environment at the time, and never be below the minimum guaranteed interest rate (often 3%).
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| Are there withdrawal or surrender charges if I want to end my contract early and take out all of my money? |
If you need access to your money, you may be able to take all or part of the value out of your annuity at any time during the accumulation period. If you take out part of the value, you may pay a withdrawal charge. If you take out all of the value and surrender, or terminate, the annuity, you may pay a surrender charge. In either case, the company may figure the charge as a percentage of the value of the contract, of the premiums you’ve paid or of the amount you’re withdrawing. The company may reduce or even eliminate the surrender charge after you’ve had the contract for a stated number of years. A company may waive the surrender charge when it pays a death benefit.
Some annuities have stated terms. When the term is up, the contract may automatically expire or renew. You’re usually given a short period of time, called a window, to decide if you want to renew or surrender the annuity. If you surrender during the window, you won’t have to pay surrender charges. If you renew, the surrender or withdrawal charges may start over.
In some annuities, there is no charge if you surrender your contract when the company’s current interest rate falls below a certain level. This may be called a bail-out option.
In a multiple-premium annuity, the surrender charge may apply to each premium paid for a certain period of time. This may be called a rolling surrender or withdrawal charge.
Some annuity contracts have a market value adjustment feature. If interest rates are different when you surrender your annuity than when you bought it, a market value adjustment may make the cash surrender value higher or lower. Since you and the insurance company share this risk, an annuity with an MVA feature may credit a higher rate than an annuity without that feature.
Be sure to read the Tax Treatment section and ask your tax advisor for information about possible tax penalties on withdrawals.
Free Withdrawal
Your annuity may have a limited free withdrawal feature. That lets you make one or more withdrawals without a charge. The size of the free withdrawal is often limited to a set percentage of your contract value. If you make a larger withdrawal, you may pay withdrawal charges. You may lose any interest above the minimum guaranteed rate on the amount withdrawn. Some annuities waive withdrawal charges in certain situations, such as death, confinement in a nursing home or terminal illness.
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| What are any other costs or charges my money might suffer? |
The annuity is typically sold as a back-end loaded contract. As such, no fees are deducted at the time of the product’s purchase. If the contract owner purchases a flexible premium annuity, there may be some annual fee for the administration of these small premium amounts.
Some might argue that surrender charges can be considered fees. However, surrender charges in an annuity contract are usually limited in their duration and almost always guarantee not to invade principal. This is significantly different from other investments, such as a CD that has a revolving surrender charge or a bond that has asset value fluctuation.
Also, some states charge a one-time “premium tax.” Depending on the state, this tax is charged either at the purchase of a deferred annuity, or upon annuitization (an immediate annuity). Some insurance companies will offer to “wash” or pay the tax from their own resources.
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| Are partial withdrawals allowed free of any penalty? |
Free Withdrawal
Your annuity may have a limited free withdrawal feature. That lets you make one or more withdrawals without a charge. The size of the free withdrawal is often limited to a set percentage of your contract value. If you make a larger withdrawal, you may pay withdrawal charges. You may lose any interest above the minimum guaranteed rate on the amount withdrawn. Some annuities waive withdrawal charges in certain situations, such as death, confinement in a nursing home or terminal illness.
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| Is there a Market Value Adjustment (MVA) in my annuity? |
A Market Value Adjustment (MVA) can be attached to a deferred annuity that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the actual crediting rates to increase or decrease in response to market conditions.
| How the MVA Works |
- The owner places money in an account that earns a fixed rate of interest (the annuity values are supported by the full faith and credit of the insurance company).
- The insurer holds the owner’s money in this account for the length of the designated guarantee period. At the end of the guarantee period there is usually a “window” when no withdrawal charges or market value adjustment will apply.
- At the end of the guarantee period, the company declares a new current interest rate, or renewal rate, which may be higher or lower than the previous rate, but not below the minimum interest rate guaranteed by the policy (typically 3% or 4%).
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How the MVA is Different
If you want to surrender your annuity prior to the end of the guarantee period, an “adjustment” will be made. The actual contract value you receive has the potential to be positively or negatively affected by current market conditions. Because the issuing company has invested your premium to ensure it can pay you the rate guaranteed in your contract, it could lose money if it had to sell those investments at a discount to refund your premium plus your earnings. The reverse can also be true.
Risk Factor
The MVA serves to protect the insurance company against investment losses incurred by early withdrawals. By having a more predictable pattern of withdrawals, MVA annuities have a greater potential to credit higher interest rates than the traditional fixed annuity.
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| How does this company’s ratings compare to others? |
Another measure of safety for the annuity buyer and those who sell annuity products is provided by independent rating agencies. Over the past century, there has been one dominant company that has rated insurance companies: A.M. Best. Typically, the practitioner has looked to A.M. Best to provide critical information regarding the solvency and profitability of the various insurance companies. In 1986 Moody’s and Standard & Poor’s began evaluation insurance companies and assigning what they called “claim-paying ratings.” Yet another agency that later joined the mix is Fitch (formerly Duff & Phelps).
In general, the rating agencies attempt to evaluate the current ability of an insurer to pay its claims. A number of quantitative and qualitative tests are conducted to make this determination. Ratings are typically assigned for a one-year period; however, each of the agencies reserves the right to change a rating at any time based on the operation results of the insurer.
It is important to emphasize that the insurance industry remains one of the most highly regulated and scrutinized industries in the country. In addition to all of the state regulatory requirements, the industry must also contend with the growing debate over federal regulation of the industry. All of this attention and regulation provides the consumer with a tremendous amount of information to evaluate the insurance industry and its safety.
| Insurance Company Ratings |
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A.M. Best |
S & P |
Fitch |
Moody's |
| Rating Descriptions | (15 rating levels) | (20 ratings) | (21 ratings) | (24 ratings) |
| Superior | A++ | AAA | AAA | Aaa |
| Negligible risk | A+ | | | |
| Excellent | A | AA+ | AA+ | Aa1 |
| Very high claims paying ability | A- | AA | AA | Aa2 |
| | | AA- | AA- | Aa3 |
| Very Good | B++ | A+ | A+ | A1 |
| High claims paying ability | B+ | A | A | A2 |
| Good | B | A- | A- | A3 |
| Average claims paying ability | B- | | | |
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| Fair | C++ | BBB+ | BBB+ | Baa1 |
| Below average protection | C+ | BBB | BBB | Baa2 |
| against risk | | BBB- | BBB- | Baa3 |
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| Vulnerable | C | BB+ | BB+ | Ba1 |
| Uncertain claims paying ability | C- | BB | BB | Ba2 |
| | | BB- | BB- | Ba3 |
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| Financially Weak | D | B+ | B+ | B1 |
| High risk factor | | B | B | B2 |
| | | B- | B- | B3 |
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| Nonviable | E | CCC | CCC+ | Caa |
The COMDEX measures the company's percentile in rated companies
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| How long do the surrender charges last? |
| Most, if not all, fixed annuities have a “back end” surrender charge. This means that there are no charges when you enter the annuity contract, but when a partial withdrawal is taken (above the allowable free withdrawal limit) or an outright surrender of the contract during the “surrender schedule,” a penalty will apply. The agent or company can advise you of the length of surrender schedule prior to purchase. The surrender schedule will also be stated in the policy contract. Usually expressed as a percentage, it will be applied against the amount withdrawn or surrendered. |
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| What is the minimum premium required? |
| Most annuities require a minimum deposit to start up the policy. Many require a minimum of $5,000, or $2,000 for IRA or qualified funds. Others may only require $25 or $50, as long as you commit to a monthly bankdraft (or automatic deposit) each month. |
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