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How Interest Rates of Fixed Annuity Are Determined

Like any other type of investment annuity needs to be understood, if not thoroughly then reasonably. Annuity involves interest rates that are not only determined by the base rates given by the banks at that particular moment but rather an array of other factors come into play and ultimately determine it. Getting into these factors is a rather expanse topic but understanding how the interest is achieved and how it works as to give you the interest on your principal will do for now.

It is always important to note that the interest rates are always compound. The rates offered by the insurance company are determined by them based on several factors that are commonly known among others that their actuarial scientists come up with. If you have taken a fixed annuity with your insurance company, it is most probable that the company will put the premiums into a government bond or a blue chip bond, this is because fixed annuities are considered to be very conservative and the least stable non-risky investments around are taken. Note that if you have a variable annuity your premiums would be invested in a company’s stock which means if the price falls or if the company suffers drastically then so will your premiums and your fixed annuity as well.

Even when the insurance happens to earn bigger earnings from investing your premiums you will only be entitled to get what you had agreed. Because of this the companies usually make more money which definitely serves to maintain it and also to attract new clients. Normally though, the insurance company will sell to you at a certain relatively high rate and it commits itself to maintain this for some years. This rate is usually called the bonus rate and it is normally set to pull clients towards signing up though it is truly beneficial to the client. Thereafter, the rate will change but this will be stated in the renew contract which comes into effect after the first few years lapse. The insurance then has the right to determine the rates which is always pegged to another external boy’s rates. This should not overly worry you though since in your contract there is a clause which states that the interest rate cannot go below a certain amount already indicated on the contract.

It is always possible to come across companies that use different rates on different premiums of the same annuity while other contracts have several already accumulated values that have been funded by different benefit options. You will be asked to pick on one choice that you want to attach to your plan.

Lastly when shopping for an insurance company, it is always important to try to establish if the company has other charges or if they have a special way of applying the rates. Sometimes you could end up exited that you have landed a great fixed annuity only for you to learn that the rate offered after all very many charges attached.