Annuities Crush 10-Year CD Yields, But 3 and 7-Year CDs More Attractive

Annuities vs. CDs March Report

(March 2012) MYIG fixed annuities (see definition below) beat the rates offered on CDs in 2 out 4 categories in February.

Most dramatically, the 10 year MYIG annuity yielded more than a full percent than the comparable CD. The annuity provided a yield of 3.40% compared to only 2.25% for the CD. Also, the 5 year annuity provided marginally higher yield than the 5 year CD. In the 3 and 7 year terms, the CD rates were higher than annuities.

 

To do this annuities vs. cds comparison, we did not use national averages.

We know the readers of LearnBonds are looking for the best rates. We compared top yielding CDs found on Bankrate and Money-Rate to the highest yielding annuities. Here are the results:

Term Top Yielding CD* High Yielding A Rated Annuity**
3 Year      1.46%        1.15%
5 Year      1.74%        1.80%
7 Year      2.70%        2.55%
10 Year      2.25%        3.40%

Annuity rates for 3, 5 and 7-year terms have dropped compared to the prior month, while the 10-year term has remained unchanged. This shows insurers/annuity providers are seeking long-term investments over short-term commitments. Yield on 3-year CDs have gone up substantially over the prior month, which indicates banks are pricing in higher inflation and a possible rate hike by the Federal Reserve.

 * 3 Year CD, First listed CD on Bankrate under national offer (CIT Bank),  5 year CD first listed under national on Bankrate  offers (Ally Bank), 7 Year, First listed CD on Money Rates (Pentagon Credit Federal Credit Union), 10 Year, First listed CD on Money Rates (Discover bank)

** 3 Year, Northern American Company Guarantee Choice 3, 5 Year, American Equity Investment Life Insurance, Guarantee 5, 7 Year, Northern American Company Guarantee Choice 7, 10 Year, Northern American Company Guarantee Choice 10

 

What is a MYIG Fixed Annuity?

A Multi-Year Interest guarantee (MYIG) annuity is often called a called “CD-Type” Annuity. With a traditional fixed annuity, your interest rate can fluctuate. With a MYIG fixed annuity, the interest rate is set for the life of the annuity (or until your able to withdraw funds without penalty). In short, both a CD and a fixed MYIG annuity pay a fixed interest rate over pre-determined period time.

Both may have fairly large penalties if you need to access your money before the pre-determined period of time is over.

 

There are three differences between CDs and Annuities that should be highlighted:

CDs are FDIC insured. Annuities are not insured by the federal government. However, the rates for all the annuities in the table come are A-rated by AM Best.  Accessing money placed an annuity before the age of 59 ½ triggers large tax penalties. You can move money from one annuity another without triggering penalties.

Fixed annuities including MYIG are tax deferred investments, similar to an IRA.

Additional Resources

Table of High Yielding CDs by Maturity Dates

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