How a Fixed Annuity Works
To purchase a fixed annuity you make a premium payment (deposit) by completing an application and writing out a check or transer
funds to an insurance company. Once the company receieves the funds the company will issue an annuity policy.
How annuities really work
When an annuity policy is issued the company sets the first year interest rate. This rate
is guaranteed for the first policy year and we refer to it as the current rate
The base rate
is that interest rate which the company projects it will pay in the
second year and thereafter. This base rate
is also referred to as the "renewal rate" is not guaranteed. In fact
some companies pay a "renewal rates" which are less than the originally projected base rate
Note the the difference between the current rate
and the base rate
to as the bonus rate
We use the Current Rate
(for the first year) and the Base Rate
(for each year thereafter) in
our formula to calculate the projected "Account Values."
Surrender Charges, Withdrawal Charges
The surrender charges last for a period years and we calculate the projected "Account Value"
for the number of years the surrender charges exist. For example; if the surrender charge of the
policy lasts seven years, we calculated the projected "Account Value" for only seven year.
The reason is the after the surrender charge expires the interest rate is dropped to the contractual
guaranteed minimum and the policy values are usually transfer to another annuity. To continue
projecting the accumulated value beyond this point is meaningless.
Most annuities allow you to withdrawn interest from your annuity without penalty.
Some annuities allow you to withdraw interest with out paying a penalty at the end
of the policy year or after 30 days, then as earned.
All most all annuities allow you to withdraw up to 10% of the account value before
a surrender charge or withdrawal charge is applied. YOU must know how
the Withdrawal or Surrender Charges apply before buying an annuity policy to save yourself