Understanding Rate Lock and How It Differs Between Income Annuities and Fixed Annuities

When you are considering purchasing an annuity as a retirement vehicle, it is important to understand rate lock and how it differs between lifetime income and fixed-rate annuities. In this helpful guide, we explain rate lock differences in simple terms to help you decide whether it’s right for you.

What is a fixed annuity?

A fixed annuity, also known as a multiyear guaranteed annuity (MYGA), is a tax-deferred retirement fund with guaranteed principal. The annuity pays a fixed interest rate for a specified period, typically between one and 10 years. As a result, it can allow you to earn a fixed return on your savings, much like a certificate of deposit (CD), and the interest earned isn't taxed until it's withdrawn.

What is an income annuity?

An income annuity is an insurance product that’s designed to provide a guaranteed stream of payments for the rest of your life or a predefined period. This type of investment vehicle isn’t vulnerable to the ups and down of the market and allows you to lock in guaranteed income either immediately or at some point in the future. People sometimes purchase these products with the intention of covering a portion of their essential expenses during retirement. This provides peace of mind and the ability to invest other remaining assets for growth.

Understanding rate lock procedures

Annuity providers have different rate lock procedures that differ between annuity types:

Fixed-rate annuities: Generally, you cannot lock in a fixed annuity rate. Though insurers usually honor the rate that applied when they accepted your application "In Good Order," it's difficult to say whether this is an industry-wide policy because insurers sometimes differ in how they treat one case from another.

Income annuities: Income annuities typically offer a rate lock feature for the income payout. The rate lock occurs when you submit an illustration with your application and it's accepted "in good order" before the offer expires.

Some companies offer an extended rate lock period at initial signup for an annuity, guaranteeing the same rate at closing that was offered when interest was first expressed. It’s important to note that the availability and terms of a rate lock feature may vary depending on the specific annuity product and the contract provisions.

Annuity illustrations

An illustration is an essential part of an income annuity application. It provides detailed information about how the product could perform over time, including your guaranteed income amount. The illustration describes the conditions under which the insurance company will honor the quoted rate.

It's important to carefully review the annuity contract and any riders or optional features to understand how the rate lock feature may apply and any restrictions or limitations that may apply.

Purchasing an annuity

Once you've chosen your provider and selected your term, it's time to make your purchase. Whether you've chosen an income or fixed annuity, these customizable financial vehicles all start with an application. Submitting an application in good order is essential for locking in the current rate.

It's important to note that rate lock features may come with certain conditions or restrictions, such as a minimum holding period or a maximum amount of time for which the rate is guaranteed. It's important to carefully review the annuity contract and any riders or optional features to understand how the rate lock feature may apply and any restrictions or limitations that may apply.

Premium payment options

You can purchase your annuity with retirement funds, such as an individual retirement account (IRA), without having to pay taxes, so long as you directly transfer the funds to the annuity or purchase an annuity within 60 days of taking personal control of the funds. If you’re using funds from an annuity, endowment, or life insurance policy to purchase an annuity, you can do a "1035 exchange" without incurring any tax liability. If you use non-retirement money to pay your premium, you can write a check or initiate a transfer.

Can you negotiate annuity terms after a rate is locked?

No, you cannot negotiate the terms of an annuity after your rate is locked. With a fixed annuity, the insurer reserves the right to give you the rate prevailing at the time the policy is issued. Note that rates can change if your application or illustration gets delayed. However, most providers will honor the rate when your application is accepted in good order.

Sometimes people change their minds shortly after buying an annuity and want their money back. Most insurance carriers give potential policyholders between 10 and 30 days to reject the annuity and receive a refund. This free-look period begins on the contract start date.

Who should purchase rate-locked annuities?

Purchasing an income or fixed annuity can be part of a sound overall retirement strategy. It's especially beneficial if Social Security or your pension won't cover your living expenses or your investment risk tolerance is low.

How to get the highest possible rate lock

When yields on MYGAs and long-term treasuries move, that's often an indicator that annuity rates will follow. Our team of annuity professionals works hard to make it easier for you to achieve a steady income for a comfortable retirement. If you have questions about rate lock and how it differs between income and fixed rate annuities, call 888-867-7620. We can provide you with information to help you prepare for the next stage of life.

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