Many seniors purchase fixed annuities for potential safety, tax savings, and asset protection. In some cases, insurance companies will offer a higher interest rate for a limited time period to encourage those investments. But what happens after that time period ends? Other than the minimum rate guarantee, do you have any assurance that you will still get a good return?
Pass-through annuities could possibly reduce that concern by limiting the amount of money the company makes on your investment.
To achieve a basic understanding about how this works, let’s look at a hypothetical example (please note that this example is for illustration purposes only and is not based upon the performance of any particular annuity product). Say you bought a fixed annuity that had the traditional method of crediting interest. If the first year’s rate included a 5% bonus, plus the 3% minimum, you could be looking at 8%. And you might think that’s pretty good.
Then year two rolls around and it’s time for rate renewal. The annuity company might only be contractually required to the minimum interest rate, even if they earned more than that on your premium payments.
With a pass-through annuity you can potentially achieve a better result, since there is a contractual guarantee in place that limits how much of the earnings an insurance company can keep. Once an insurance company takes its share, the rest of the investment return is “passed through” to you.
Of course, any additional fees that are charged for this guarantee could reduce your overall return. The interest rate and pass-through features of these annuities can also vary from company-to-company. Annuities are designed for long-term investing. Ordinary federal income taxes and a 10% tax penalty could apply to withdrawals taken prior to age 59½. Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company, and are not government-insured. Surrender charges can also apply to withdrawals, based upon the time the insured has been invested in the annuity.
Because there are so many annuities on the market, get retirement help by locating an experienced annuity agent.