How Do Annuity Rates Really Compare With CDs?

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Many insurance providers sell fixed annuities as an alternative to bank certificates of deposit, with guaranteed interest rates for a fixed period of time and the primary goal of principal protection. Yet as easy as it is to compare bank CD rates across the nation, it can be a real challenge to try to find out about annuity rates without working directly with an insurance agent. There are some reasons why getting annuity rate information can be tricky, but it's still possible to get a sense of how much higher annuity rates are compared to CDs and whether fixed annuities therefore make sense for you. Let's take a closer look at the challenges of the annuity market and how annuities compare to CDs.

How regulation affects what you can buyThe different ways in which regulators work with different kinds of financial institutions is in part responsible for the greater difficulty in finding annuity rates. With banks, much of the regulation occurs at the federal level, and there's much less oversight into the specific interest rates that banks offer on their savings products. As a result, it's typically easy for anyone across the nation to take advantage of CD offers at a particular bank, with just a few exceptions for special promotional offers that are sometimes restricted to those who live relatively close to the bank making the offer. For those who are interested in credit unions, membership limitations might prevent you from being able to join the credit union to take advantage of an attractive CD offer, but increasingly, more credit unions are broadening access in order to build up their customer bases.

By contrast, insurance regulation largely occurs at the state level. As a result, insurance companies often have to get approval in every state in which they do business, and you'll often see warnings about how policy terms and conditions can vary from state to state. Indeed, some products aren't even available in certain states if the local insurance regulator hasn't given approval for that particular product.

A host of optionsThe other major factor that makes annuity rates hard to get is that there are many different relevant provisions of a fixed annuity to consider. With a CD, usually all you need to know are the term of the CD and the interest rate it carries. Minor differences in early withdrawal penalties typically go unnoticed.

With fixed annuities, though, there are several other things to consider. The rating of the insurance company can be important, since the absence of FDIC insurance means that the annuity company's guarantee is what stands behind the product. Annuity buyers also have to consider not only how many years the rate is guaranteed for but also the number of years that have to go by before surrender charges disappear. Those periods often coincide but are sometimes different, so it pays to check to be sure. Some annuities offer a bonus rate for the first year that then falls to a lower base rate for the remainder of the guaranteed period. Finally, provisions that allow for withdrawals of a portion of your annuity without penalty vary slightly. All of these factors can influence the rate an insurance company offers on a fixed annuity and make it harder to do an apples-to-apples comparison.

How CD and annuity rates compare: an exampleDifficulties aside, you can still find some comparisons between annuity rates and CD rates if you look hard enough. For instance, using online resources from Bankrate and AnnuityFYI, I took a look at rates for various products for a Massachusetts resident.

In comparing five-year CDs with fixed annuities with a five-year guarantee, rates on the annuities were slightly higher. The best five-year CD rate was 2.45%, with several offers in the 2% range, although there were some banks that paid less than 0.5% even to lock up money for that long a period. Meanwhile, annuities offered yields as high as 3%, with more than two dozen options falling above the 2.5% level. One thing to keep in mind, though, is that many of the high-paying annuities had relatively large minimum investments, with typical minimums of $10,000 and some requiring investments of as much as $250,000. Some five-year annuity rates were as low as 1%.

For products focusing on a three-year period, the disparities weren't quite as large. The best CD paid 1.85%, while the best annuities were at 2%. Yet several options on both products fell in the 1.5% to 1.75% range, making it more of a coinflip from a rate standpoint to figure out which was better.

Overall, given how close CD rates tend to be to what annuity products pay, annuity rates shouldn't be the deciding factor in getting you to choose a fixed annuity over a CD. With so many other factors to consider, including expenses, access to your capital, and the various features of both products, it's far more important to ensure that a certain annuity will meet your needs rather than simply focusing on rates to the exclusion of all else.

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