If you’re looking for a safe and insured fixed-interest account, you’ll want to compare fixed annuity accounts to bank CDs. Both offer pros and cons depending on what features are most important to you.
The chart below compares the advantages and disadvantages of both accounts side by side. It’s important to know that fixed annuities usually offer higher interest rates than CDs. They also allow owners to defer taxes, but their surrender penalties are higher overall.
Fixed Annuity Versus Bank CD
|Investment Feature||Annuity||Certificate of Deposit|
|Safe & Insured?||Yes||Yes|
|Insured By?||State Insurance Guaranty Association||Federal Deposit Insurance Corporation|
|Insured Up To?||$250,000|
|Rates Are Fixed And Guaranteed?||Yes||Yes|
|Can Withdrawal Principal During Term?||Yes||No|
|Fully Liquid At End Of The Term?||Yes||Yes|
|Full Death Benefit To Beneficiaries At Passing?||Yes||Yes|
|Accepts Qualified Money Like IRAs?||Yes||Yes|
|Account Can Be Stretched At Passing?||Yes||No|
|Allows Additional Deposits?||Sometimes||No|
|Offers Lifetime Income Stream?||Yes||No|
|Penalty-Free Withdrawals For Health Expenses?||Yes||No|
|Principal Reduced By Agent Commissions?||No||No|
|Early Surrender Penalties?||Yes||Yes|
|Currently Offers The Highest Rates?||Yes||No|
Do Bank CDs Or Annuities Offer The Best Rates?
We are currently in a historically high interest rate environment. This impacts yields for all fixed-income accounts. If you have a CD coming due or are shopping for the best money market account, you know rates are high right now. Better than we’ve seen in 20 years. These higher rates are also positive for fixed annuities.
Fixed annuities can be advantageous as they are oftentimes more versatile than bank funds. They primarily invest in government treasuries, but they also purchase highly-rated corporate debt. Smaller annuity companies are even more agile. They can purchase smaller tranches of high yielding debt that might not suit larger companies.
This translates to better fixed rates for most annuities. By tapping into multiple debt markets, their portfolios offer better returns. Those returns filter down to consumers. It’s common to see a five-year annuity yield well over 5% while banks are half of that at best.