This type of annuity provides a client with a guaranteed rate of return each year. There are two different types of traditional fixed annuities, and the major difference is how long the annuity product will lock in the interest rate guarantee. Both types provide tax deferred interest accumulation and always have a guaranteed minimum interest rate every year (this is the guaranteed minimum rate of interest the annuity product will ever credit and is generally 2% or 3%).
Long-Term Rate Guarantee Annuity
For example, an annuity has an initial declared rate of 4% for 5 years. If you purchased and annuity with $100,000 and earned 4% in year 1, the accumulated value at the end of the year would be $104,000. After year 2 it would be $108,160, $112,486 after year 3, $116,985 after year 4, and $121,665 after year 5.
Annual Declared Rate Annuity
With this type of annuity, the insurance company provides a declared rate of interest every year. For example, an annuity pays you 4% guaranteed for one year. On the one year anniversary date, the insurance company will declare what the interest rate will be for the next 12 months. The nice thing about this type of fixed annuity is if the interest rates go up, you could possibly get a higher rate than the previous year. In addition, some of the annual declared rate fixed annuities have a bonus in the first year. For example, a $100,000 premium earns 4% for the first year with a premium bonus of 4%. The combined first year interest earnings would be 8% with the bonus. At the end of the first year, you would have $108,160. At the end of the second year, with a renewal rate of 4%, the account value would be $112,486.
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