The CD-type Annuity Aims To Trump the CD

Annuity companies have come up with a CD-type annuity to better compete with a bank CD. Here's what it's all about...

*The typical fixed annuity:

An annuity is a contract with an insurance company where you get tax-deferred earnings on your investment. What is generally referred to as a 'fixed' annuity is one where the insurance company guarantees to pay a fixed interest rate for some period less than the time you hold the investment. Typically that rate is usually only guaranteed for the first year. It may drop after the guaranteed period, and then be adjusted annually.

If you're not yet annuitizing, you have a deferred fixed annuity. The insurance company may charge you to withdraw money from it during some initial period. As an example, you may have to pay an 8% penalty if you withdraw money during the first year. After that, the penalty is usually decreased by 1% each year.

Because of the tax-deferred feature of annuities, all its earnings when they're withdrawn are taxed as ordinary income; but also, the IRS will also imposes an additional 10% penalty on any earnings you take out before you turn 591/2.

*CD-type annuities:

Unlike a fixed annuity the CD-type annuity guarantees its fixed-rate annuity for the duration of the term you choose. So, if you buy a five year CD annuity at 5% and hold it for that term, you'll get the 5% annual earnings rate. Of course, you're locked into that rate for the duration.

Some CD annuity contracts will allow you to take up to 10% of the balance or up to 100% of the interest annually without any insurance company penalties charged. So if you're older than 591/2, you have some access to your money.

Surrender charges for a CD-type annuity are similar to those of fixed-rate annuities. There's no FDIC coverage on the investment. Some CD annuities have escape clauses in which the company penalty is waived if the customer allows the payments to be made over a five-year period or longer.

*3 ways to compare a CD-annuity to a Bank CD:

1. Bank CDs are FDIC insurance up to $100,000 ($250,000 for 2013) per account. Annuities are backed only by the financial strength of their company, but insurance coverage is in the range of $100,000 depending on the state.

2. The earnings of bank CDs are taxable as income annually. But annuity-type CDs are tax-deferred and you can roll over an old one into a new one after its term is up with a 1035 exchange provision.

3. You can make partial withdrawals from a CD-type annuity for up to 10% of the initial investment annually. Typically bank CDs allow no premature withdrawals without significant penalties.

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