When it comes to fixed annuities, there are two primary interest rate strategies: the annual interest rate strategy and the multi-year interest rate strategy. Both have their pros and cons, so how do you know which is right for you? In this guide, we will break down both strategies and help you decide which is best for your unique situation.
Annual Interest Rate Strategy
The annuity provider sets the first-year and renewal interest rates for a deferred fixed annuity using an annual interest rate method. The interest rate for the first year is applicable to new annuity contracts, whereas the renewal rate is used for subsequent contract years.
Although the interest-crediting rate that applies to new contracts is usually the same as that applied to renewing contracts at the same time, this isn’t always the case. An insurer may offer a first-year interest-crediting rate that is higher than its regular interest-crediting rate in order to entice new business. This higher rate in traditional fixed annuities is called a “teaser rate”.
Multi-Year Interest Rate Strategy
There are several other alternative declared-rate annuities, including interest rate guarantees that last for years at a time. A multi-year guarantee annuity (MYGA) is a type of fixed deferred annuity with a guaranteed interest rate for longer than one year. While some multi-year guarantee annuities have a two-year rate period, these contracts usually pay current interest rates for three to ten years. They are created with the intention of appealing to individuals who would otherwise be interested in depositing money in certificates of deposit.
Renewed Interest Rates
The contract may be surrendered at the end of the guaranteed period without payment of surrender charges, as long as it is done within the 30-day grace period. If the owner does not surrender the contract or select a new renewal period, it is automatically extended for another multi-year term (at a renewed interest rate) that equals the prior period at the conclusion of the 30-day window.