Why A Fixed Rate Annuity Is Not A Savings Account
Posted June 13, 2014on:
Recently, we took the money out in favor of a better investment, and boy was she in for a shock! There was a $17k surrender charge and nearly $3.6k in tax withholdings. All the interest she supposedly earned in the annuity went to the surrender charges, and now she has to pay income taxes on that interest!
Here is why a fixed rate annuity is nothing like a savings account.
1. A savings account is FDIC guaranteed, in other words, it has the full faith and credit of the US government behind it. A fixed rate annuity is NOT FDIC guaranteed, it only has the credit of the issuing company behind it. Think AIG!
2. A savings account will never charge you an arm and a leg for taking your money out, but a fixed rate annuity will, if it is so written in the annuity contract you didn’t read.
Buying a fixed rate annuity is like lending your money to the insurance company. If you didn’t know it yet, insurance companies are just plain old corporations, and the prevailing interest rate for lending to corporations is about 5.5%. Think on that!
So, with an annuity you get struck twice, first with the interest rate, then with the surrender charge. I think it’s safe to call a Fixed Rate Annuity a bad investment. Wouldn’t you?
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