It is interesting to know that during the last three decades, interest rates on secure deposits have sharply swung from as high as 14 percent to below 3.5 percent. This makes all predictions about the behavior of future interest rates difficult. This leads to the larger question – how to identify a secure investment that will fetch a steady assured income and how does this effect annuities?
One possible solution would be to spread your risks by choosing annuities with varying maturity dates and aalocate your money over a wide spectrum of interest rates. It is common knowledge that fixed investments that are long-term yield a higher rate of interest. But the drawback is it will be tough to realize cash from long-term investments and buy afresh new investments fetching higher returns - when interest rates shoot up. So, how to successfully cope up with interest rate fluctuations when they become volatile?
The one wise step would be to consider MVAA (Market Value Adjusted Annuities) with a multi-year interest guarantee. The multi-year guarantee allows you to lock in the annuity rate for terms up to 10 years. Interestingly, at the end of each term, the annuity company will offer fresh interest rates and allow you to withdraw the money from such annuities without incurring surrender charges.
But, in the event you want to prematurely withdraw the money for whatever reasons, before the end of the term, the annuity company will treat your investment like a bond and adjust the surrender value taking into account the interest rates then in effect. In other words, your account would be credited for value in the event that interest rates had dropped (bond values risen) and vice versa.
Thus, MVAA could mean extra flexibility for your annuities to deal with the fluctuating interest rates. If interest rates dip, you can liquidate your annuity and realize the profit because of the market value adjustment factor. Again, if the interest rates shoot up, you can still feel secure as the market value adjustment will have negative impact but just hold onto your existing contract.
The fact is MVAA is free from any sales load factor and/ or other operational expenses because the insurance company's expenses are covered by the interest rate stipulated in the contract. Further, your contract may attract a premature withdrawal charge or surrender charge during the first 5 to 10 years of the contract. Please seek specific clarifications about this aspect when buying annuities as all costs are clearly detailed in the contract.
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