Fixed annuities often come with high initial interest rates when they're first purchased. To remain competitive, insurance companies that issue annuities will often provide an enhanced first year rate to lure annuity buyers.
But then the first year ends. The interest rate is reset on an annual basis, and when many fixed annuity owners find out what their renewal rate will be, the honeymoon's over. Plus, since annuities are long-term contracts that can last up to 14 years or longer, annuity owners often find themselves locked in.
Now, there is a new type of fixed annuity on the market that provides more assurances and flexibility than ever before.
It's called the Pass-Through Annuity, and it brings much more accountability to the fixed annuity owner.
Here's how it works: Insurance companies make money, like most financial institutions, by the "spread." The spread is the difference between what the company is paying out to customers, and what they're actually making on the customers' money.
Pass-through annuities are offered by several different companies. Each one offers different features and contract terms, which can be explained by a SaveWealth Advisor.
In most fixed annuities, the spread is unknown. It can range anywhere from 1.5% to 5%, depending on the company issuing the annuity. The fact of the matter is, most insurance companies do not divulge their spread, and vary it based on market conditions. This fluctuation can lead to uncertainty when an annuity comes up for renewal.
Not so with the pass-through annuity. A company that issues a Pass-Through Annuity tells the customer up front what their spread is. In other words, they promise to "pass-through" the entire rate of return on the annuity owner's money, minus a fixed spread (usually 2-3%).
This makes it easier for the annuity owner to know what their annual interest rate will be, and eliminates a lot of uncertainty at renewal time.
For example, assume Insurance Company A offers a Pass-Through Annuity. In the annuity contract itself, the Company will state how much it will keep for itself, promising to pass-through the remaining interest rate to the annuity holder.
Let's suppose that after the first year, the internal rate of return from the company equals 7%, and Company A has set a spread of 2%. At renewal time, the annuity owner will have a new interest rate of 5%, locked in by the annuity contract. There's no wondering what the renewal rate will be, and the spread cannot increase or decrease for the life of the contract.
Declaring a fixed spread is a new concept in annuities, developed in response to historically low renewal rates. In addition, many annuity owners have demanded to know how well their company performs, and by what calculation their interest rate is determined every year.
The Pass-Through Annuity solves this dilemma. With a Pass-Through Annuity, the customer and insurance company become partners who have a vested interest in succeeding together.
Most insurance companies will tell you they work hard on your behalf. But a Pass-Through Annuity holds them to that claim, by restricting the spread and tying their earnings to the performance of the annuity.
As professional money managers have learned, earning a fixed percenage on assets is more profitable when you control more assets. After all, the more assets you have in your annuity, the higher their spread will be.
By tying the company's earnings to the value of your annuity, the full disclosure of the Pass-Through Annuity encourages the company to earn a higher return. If their internal rates of return are not stellar, your annuity would not grow as much, reducing their spread.
For a FREE Special Report on Pass-Through Annuities, or help in finding a company that offers them, click here!
Annuities are long-term retirement vehicles. Significant tax penalties apply to withdrawals made before age 59 1/2. Surrender charges and fees may also apply.
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Annuities are not FDIC insured. Be sure to read the contract carefully before purchasing one.
Rates mentioned are purely hypothetical. Past performance is not an indication of future results.