How to Compare Annuity Quotes

Annuities reached their peak of popularity back in the 1990s when the yields on fixed annuities were relatively high, variable annuities were performing well against the backdrop of surging markets, and indexed annuities, with their innovative principal protection features were just being introduced. Then, interest in annuities began to subside in the 2000s when interest rates began to fall, and the stock market become more volatile. Now, with tens of millions of Baby Boomers on the threshold of retirement, annuities are back in the limelight as one of the few vehicles that can provide stability and predictability during uncertain times. With literally hundreds of different annuity products to choose from the challenge for most people is in how to compare annuity quotes in a way that won’t drive them absolutely bonkers.

Annuity comparison sites offer you the best opportunity to quickly narrow down your choices. They have very powerful data aggregation and search engines that enable you to sort annuity products based on certain preferences and types.  While this can save you time, if you aren’t quite sure of what it is you are comparing, you could easily run yourself off the rail.   The specific information or features to compare differ from one annuity type to the next. In addition to key features, rates and expenses, there are a multitude of options (with additional costs attached) to consider as well.  It would be impossible to provide an exhaustive guide in this short of space, but we have at least outlined some of the key points of comparisons for four of the primary annuity types.

Fixed Annuities

The most important feature to most people is the interest rate. If there were just one type of fixed annuity this would be a fairly straightforward comparison. But interest rates are applied differently depending on the way the fixed annuity is structured, so you want to make sure you are comparing apples-to-apples. The primary parameters for comparing interest rates are: the initial fixed rate, the rate period (and what part of it is guaranteed), the minimum rate guarantee, bonus rate (if offered for larger deposits).

On the expense side, the key parameters are: the surrender provisions which include the surrender fee schedule, annual expenses such as mortality costs and administrative costs.

Indexed Annuities

These should be thought of as fixed yield annuities with the yield being determined by participation in a stock index instead of an insurance company’s bond portfolio. So, there isn’t a comparison to be made of yields, but, rather a comparison of the way the yield is credited. When the stock index is positive for the year, the percentage gain in the index is applied as a credit after a participation rate and a cap rate are factored in.  The higher the participation rate and the cap rate, then the higher the yield that is credited. So, these become the primary points of comparison as does the minimum rate guarantee. The higher all three of them, the better the potential return.

But the rates aren’t everything. It is important to look beyond the rates to see how they are determined and how long they last. If the initial participation rate is only guaranteed for a year, it means it could be reset at a lower rate in the future. It might be better to have a lower initial participation rate and have it guaranteed for a longer period. The same holds true with the cap rate.  Also, a high participation rate may not be such a good deal if the annuity has a lower cap rate. These points of comparison need to be weighed in light of the long term performance of the annuity.

Variable Annuities

Variable annuities are comprised of separately managed investment accounts, so there is no way to use current rates as a point of comparison. And, it is not recommended that you try to compare the investment accounts based on past performance. Rather, you should consider how the investment objectives of the accounts mesh with your own objectives. There should also be a sufficient number of accounts from which to choose to better create the proper allocation of funds to meet your profile. Because variable annuities include investment management expenses, these can be a direct point of comparison – the lower the better. You can expect more actively managed stock accounts to have higher management expenses than less actively managed accounts, but higher expenses don’t necessarily translate to better performance.

Immediate Annuities

These are a much easier product to compare side-by-side.  You are looking for either the highest monthly payout based on a lump sum deposit, or the lowest amount of deposit required to meet your income need.  All comparisons are based on the same parameters: your age, your income need or deposit amount, your life expectancy or specific income period.  You will also need to do a comparison of payout options, such as joint life, single life, term certain with refund. These will be based on your family situation and the need to continue income after your death.  It is important to note that any options you choose are irrevocable, so careful thought needs to be given in their selection.

Narrow Your Choices before Comparing

Even when you know what to look for in comparing annuity quotes, it can still be a very daunting task due to the large number of annuity products. Your best bet is to set your criteria up front in order to narrow the field. The recommended approach is to limit your search to those products from the highest rated insurance companies (A+ or better with A.M. Best, AAA with Standard & Poor’s). You will still have a few dozen products from which to choose and the higher rated companies can be as competitive as the lower rated companies.  More importantly, their superior financial strength will provide one more layer of security.