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Deferred Annuities from Best Insurance Direct™
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CDs and deferred fixed annuities are savings vehicles used to accumulate wealth. However, these two products are quite different; each has its own unique strengths and uses. For the sake of comparison, let's look at two similar versions of these products — an individually owned, Non–Qualified bank CD and an individually owned, Non–Qualified single premium deferred fixed annuity earning an annually renewable fixed rate of return.
Safety of Your Principal Investment
CDs and deferred fixed annuities are considered low–risk investments. CDs are generally issued by banks and, in most cases, are insured by the Federal Deposit Insurance Corporation for up to $250,000 per depositor. Deferred fixed annuities are issued by insurance companies and are not insured by the U.S. government. They are backed by the financial strength of the issuing insurance company, regardless of the amount. Therefore, before purchasing an annuity, you should make sure the issuing insurance company is financially sound. You can determine financial strength by requesting the findings of independent rating companies such as Moody's, A.M. Best, Standard & Poor's and Fitch. These companies evaluate the financial strength of insurance companies and publish ratings that give their assessments of each company.
Interest Return
CDs offer a guaranteed rate of return for a specified period of time. Interest rates will vary depending on current market conditions and the length of time to maturity. Generally, the shorter the period of time to maturity, the lower the rate. There is no guaranteed minimum for renewal rates.
With a deferred fixed annuity, a guaranteed interest rate is locked in for an initial period. After that, interest rates may be adjusted periodically, generally each year. Deferred fixed annuities also offer a guaranteed minimum interest rate, regardless of market conditions.
Tax Savings
If taxes are a concern, a deferred fixed annuity may be a better option for several reasons.Earnings on CDs are taxable in the year the interest is earned, even if you don't take the money out. With deferred fixed annuities, earnings accumulate tax–deferred and are not treated as taxable income until they are withdrawn, which gives you a measure of control over when you pay taxes.
Deferred fixed annuities may also help reduce or eliminate the taxes on your Social Security benefits. By leaving your money in a deferred fixed annuity, you can reduce your taxable income, keeping it below the level where you would begin to owe taxes on your Social Security benefits. With CDs, your interest earnings count in the calculation of how your Social Security benefits will be taxed — even if you don't withdraw the earnings. As much as 85% of your Social Security benefits could end up subject to taxation.
Liquidity
A deferred fixed annuity also provides you with access to your money should the need arise. With a deferred fixed annuity, withdrawals during the first several years are generally subject to surrender charges. Most companies will give you the flexibility, however, to withdraw a portion of your deferred annuity's account value, usually 10% each year, without a company–imposed surrender charge. Once the surrender charge period has expired, you can generally access your money at any time without surrender penalties. Withdrawals may be taxable and, if they are made prior to age 59½, may be subject to a 10% penalty tax.
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 fixed annuity).In a deferred fixed annuity, you may elect to withdraw your money in a lump sum or you may want to select a lifetime income option, which provides you with a flow of income that you cannot outlive. You could also elect to let your funds continue to accumulate until a need arises.These are just a few of the factors to consider when making your selection between a CD and a deferred fixed annuity. For more information about any of our annuities, contact us today 770-329-7695
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