I am asked regularly why an Annuity can pay a higher rate than a CD if all interest rates are similar.
This short Kiplinger article shares that banks and credit unions make their money on loans: personal loans, commercial loans and mortgages. Interest rates on these loans are very, very low currently. Banks also have to absorb significant overhead costs and loan defaults. There is very little left to pass along to people who save in a CD.
Fixed Annuities, on the other hand, are backed by the general account fund of the insurance company. Life insurance companies invest in a diverse mix of corporate and government bonds, stocks, mortgages, real estate and policy loans. These are longer term investments and offer higher returns than loans from banks. And banks and insurance companies are regulated differently. Insurance companies have advantages in investment flexibility, cost structure and risk tolerance that banks do not.
See more in this Nasdaq article, Why Fixed-Rate Annuities Pay More Than Bank CDs. If you’re unable to retrieve this article, let us know and we’ll send you a copy.
And, if you have any questions, give me a call.
