Episode Show Notes
So I had a conversation with my aunt last month — she’s sixty-eight, lives outside Knoxville, just finished working — and she called me because she’d been Googling ‘best fixed annuity’ for like two hours and was completely overwhelmed. And honestly, Caleb, I didn’t know what to tell her.
That’s such a common starting point. You search for the best rate, you get a wall of numbers, and none of it tells you whether any of those products actually fit your situation.
Right, and she’s not unsophisticated. She managed a department for thirty years. But fixed annuities — the terminology alone is a lot.
Let’s just start at the foundation then, because I think it helps to get the framing right. A fixed annuity is an insurance contract. Not an investment product. That distinction matters legally and practically.
Why does that distinction matter to someone like my aunt, though? In plain terms.
Because the rules are different. The protections are different. It’s issued by an insurance company, regulated by the state insurance department, and if something goes wrong with the carrier, you’re covered by the state guaranty association — not the FDIC. Those are different safety nets.
Okay, so let’s actually walk through what the product does. You hand over money and then what?
You make a lump-sum payment — most fixed annuities are single premium, meaning one payment — and the carrier credits your account with a declared interest rate for a set period. Could be two years, could be ten. At the end of that period, you’ve got options: renew, convert it into an income stream, or move the money somewhere else.
And the two main types are MYGAs and SPIAs, right? I always have to slow down on the acronyms.
Yeah. MYGA — multi-year guaranteed annuity — locks in that declared rate for the whole term. So if you buy a five-year MYGA, you know exactly what rate you’re getting for those five years. SPIA is a single premium immediate annuity, which is a totally different animal.
The one where income starts almost right away.
Exactly. You hand over a lump sum and within about thirty days, you’re getting income payments. Monthly, quarterly, whatever the contract specifies. There’s no accumulation phase — you’re converting directly to income.
So for someone like my aunt who needs income now, a SPIA might be more relevant than a MYGA.
Potentially, yeah. It really depends on whether she needs that income to start immediately or whether she has other income sources and wants to grow a chunk of money tax-deferred for a few years first.
That’s actually the first question she should answer before she even looks at rates.
One hundred percent. What’s the goal? Growth or income? That narrows the field dramatically before you ever look at a rate table.
Okay, so let’s talk about rates, because that’s what everyone fixates on. How does a carrier even come up with the rate they’re offering?
It’s tied pretty directly to the bond market. Carriers take your premium, they invest it primarily in U.S. Treasuries and investment-grade corporate bonds, and the yield they earn on those bonds is what funds the rate they can offer you. So when bond yields go up, fixed annuity rates tend to follow. When yields fall—
The rates come down too.
Right. And this is why rates can shift week to week. It’s not arbitrary — it’s tracking something real in the market.
Which means if you see a rate you like today, waiting a month might mean that rate is gone.
It could go up, it could go down. You genuinely don’t know. That’s one reason it helps to work with an agent who’s watching this regularly, because they’ll know when something attractive is available and whether it’s likely to stick around.
Now here’s where I want to push back a little on the whole rate-chasing thing, because I feel like that’s the trap a lot of people fall into. My aunt was literally ranking carriers by rate alone.
Oh, that’s such a common mistake. And I get it — higher rate looks better on paper. But the rate is only one piece of what you’re evaluating.
So what else should she be looking at?
First thing I’d look at is the carrier’s financial strength rating. AM Best, Moody’s, S&P — they all publish ratings for insurance companies. You want to see an A rating or better from AM Best. A carrier offering a slightly higher rate but carrying a weaker financial rating — that’s not a trade-off worth making.
Because if the carrier gets into trouble, you’re relying on the state guaranty association, and that has limits.
Exactly. Tennessee’s Life and Health Insurance Guaranty Association does provide protection if a carrier becomes insolvent, but there are coverage limits. It’s not unlimited. So the financial strength of the carrier you pick genuinely matters.
What’s the second thing after financial strength?
Surrender charges. This is the one that catches people off guard more than almost anything else.
Explain that for someone who’s never seen one.
So when you put money into a fixed annuity, you’re agreeing to leave it there for the contract term. If you need to pull money out early — before the surrender period ends — the carrier charges you a penalty. And those penalties can be significant in the early years. Like, a ten-year contract might have a surrender charge of eight or nine percent in year one, stepping down each year.
Wait, so if someone puts in a hundred thousand dollars and needs it back in year two—
They could lose several thousand dollars to the surrender charge, depending on the contract. That’s why matching the contract term to your actual time horizon is so important.
How long can you actually leave this money untouched? That’s the real question.
Right. And most contracts do have what’s called a free withdrawal provision — usually you can pull out up to ten percent of your account value each year without triggering the surrender charge. But it varies by contract, so you need to confirm that before you sign.
Ten percent per year is something at least. That’s not nothing.
It’s meaningful if you need a little liquidity. But if you need your full principal back, that’s a different story.
There’s another thing I’ve heard people ask about — renewal rates. Like, what happens when the initial term ends?
This is a big one. Some carriers will offer a very attractive initial rate to get you in the door, and then when the term renews, the renewal rate drops considerably. It’s not illegal, but it’s something you should ask about before you commit.
How do you even find that out? Like, can you look up a carrier’s renewal rate history?
A good independent agent will know this. They work with these carriers repeatedly and they see what renewal rates look like. It’s one of those things that doesn’t show up on a rate table but matters a lot in practice.
Okay, so I want to get into the CD comparison because I think that’s where a lot of Tennessee savers are coming from. They’re used to CDs, they understand CDs, and someone tells them a fixed annuity is kind of like a CD.
It’s a fair comparison to start with, but there are real differences. The surface-level similarity is that both offer a declared rate over a set term. You know what you’re getting going in.
But then the differences start to pile up.
The big one is tax treatment. Interest in a CD — you’re paying taxes on that every year, even if you’re not taking it out. Inside a fixed annuity, the growth is tax-deferred. You don’t owe anything until you take a distribution.
Which, for someone who’s trying to grow a chunk of money over five or seven years, that compounding without the annual tax drag can actually add up.
It can, yeah. Especially in a higher rate environment. Now, Tennessee is interesting here because the state eliminated the Hall Income Tax back in twenty twenty-one, so there’s no state income tax on annuity distributions for Tennessee residents. But federal tax still applies to the earnings.
And if you funded the annuity with pre-tax money — like rolling over a traditional IRA — the whole distribution is taxable at the federal level, not just the earnings.
Exactly right. The tax rules get complicated fast, which is why we always say talk to a qualified tax professional before making any decisions based on tax treatment.
What about the FDIC piece? Because I think that’s where some people get nervous.
CDs at FDIC-member banks have federal deposit insurance. Fixed annuities don’t. They’re backed by the issuing insurance company and covered within limits by the state guaranty association. Different protection mechanism.
And the liquidity difference is real too. If you need to break a CD early, the penalty is usually pretty modest.
Yeah, CD early withdrawal penalties are typically just a few months of interest. Fixed annuity surrender charges can be much steeper, especially in the early years of the contract. That’s the trade-off for the potentially higher rate and the tax deferral.
Have MYGA rates actually been higher than CD rates? Because I’ve heard that but I don’t want to just take it on faith.
In recent years, yes, MYGA rates have frequently come in above comparable CD rates. But I want to be careful here — that’s not a promise of anything going forward. It varies by carrier, by term, by the rate environment at any given moment. And past rate relationships don’t tell you what next month looks like.
Fair. So let’s talk about who this actually makes sense for. Because I don’t think fixed annuities are for everyone.
They’re definitely not. The people who tend to get the most out of them are folks who are within, say, five to fifteen years of retirement and want to protect a portion of their savings from market swings. Or people who’ve already maxed out their IRA and four-oh-one-k contributions and want another bucket of tax-deferred growth.
Or someone already retired who needs predictable income to cover the basics — mortgage, utilities, groceries.
Right. That’s where a SPIA can be really powerful. You know exactly what’s coming in every month. There’s no market volatility affecting that number.
And who’s it not for?
Someone who might need access to their full principal in the short term — that’s a mismatch with the surrender charge structure. And someone who’s comfortable with market exposure and is really looking for long-term growth potential — there are other tools better suited to that.
I think that’s actually the thing people miss. A fixed annuity isn’t trying to beat the market. That’s not the job.
That’s a really good way to put it. The job is predictability. Stability. Knowing what you’re going to have. If that’s what you need, it can be a solid fit. If you’re chasing growth, it’s probably not the right tool.
Let me ask you something that I think a lot of people in Tennessee specifically wonder about. Does it matter where in the state you are? Like, does being in Memphis versus Nashville versus Knoxville change anything about what’s available to you?
Not really, no. Tennessee is one state, one regulatory environment. The carriers available to you and the rates they offer are going to be the same whether you’re in Memphis or Johnson City. What might differ is the agent you’re working with and their familiarity with certain carriers.
So it’s less about geography and more about who you’re working with.
Exactly. An independent agent who has access to multiple carriers is going to be able to do a real comparison for you. Someone who’s captive to one company can only show you what that company offers.
Okay, let’s do a practical scenario. Picture a couple, both sixty-five, they’ve got a hundred thousand dollars they want to put to work. They’re not going to need this money for at least five years. What’s the thought process?
So first question is — do they have other income covering their expenses? Social Security, pension, whatever. If the answer is yes, this hundred thousand is really a growth bucket, and a five-year MYGA might make a lot of sense. Lock in a declared rate, let it grow tax-deferred, revisit in five years.
And if the answer is no — they need some of this to cover expenses?
Then you’re looking at something different. Maybe they put a portion into a SPIA to generate income now, and keep the rest somewhere more liquid. You wouldn’t want to put everything into a MYGA if you’re going to need income from it in year two.
Because of the surrender charges.
Right. And this is exactly why the ‘define your goal first’ step is so important. The product has to match the need.
I also want to flag something about death benefits because I think people don’t always realize this is part of the contract.
Yeah, most fixed annuities include a death benefit provision. If you pass away before the contract matures, the remaining value goes to your named beneficiary — typically without going through probate. For people who want to leave a specific dollar amount to heirs, that’s a meaningful feature.
That’s actually something my aunt mentioned. She wants to make sure her daughter gets something. And I didn’t even think to connect that to the annuity conversation.
It’s one of those features that often gets overlooked when people are focused on the rate. But it’s in the contract. It’s worth understanding.
Okay, so let’s say someone’s listening to this and they’re ready to actually start shopping. What does that process look like?
Step one, figure out your goal — growth or income. Step two, figure out your time horizon honestly. Not how long you think you should be able to leave the money, but how long you actually can. Step three, work with a licensed agent who can pull quotes from multiple carriers, not just one.
And then actually read what you’re signing.
Please. Read the contract summary. Specifically the surrender charge schedule, the free withdrawal provision, and the renewal rate terms. Those three things will tell you a lot about whether this contract actually works for your life.
I feel like the surrender charge schedule is the thing people skip because it’s the least exciting part of the document.
And then it becomes the most important part of the document the moment they need their money back early. It’s not fun to read, but it matters.
What about people who are doing this research online and just comparing rate tables? Is that a useful starting point or is it kind of misleading?
It’s a starting point. It can help you get a sense of the range of rates available and which terms are competitive. But a rate table doesn’t tell you the carrier’s financial strength, the surrender schedule, the renewal rate history, or whether the contract has the free withdrawal provisions you need. It’s like reading a menu that only shows prices but not what’s actually in the dish.
Ha. That’s a good way to put it.
You need the full picture before you order.
One last thing I want to touch on — and this is something I know comes up — is the idea that there’s one objectively best fixed annuity out there. Like, if you just search hard enough, you’ll find it.
There isn’t. I mean that genuinely. The contract that’s right for a sixty-two-year-old in Nashville with a pension and Social Security already covering expenses is going to be completely different from what’s right for a fifty-eight-year-old in Memphis who’s self-employed and has no pension.
Same state, same product category, totally different needs.
And that’s before you factor in tax situation, whether they have other liquid savings, what their heirs situation looks like. The ‘best’ fixed annuity is the one that fits your specific picture. Which is why the conversation with a licensed agent isn’t optional — it’s really the whole point.
And a licensed Tennessee agent specifically, because they know the state regulatory environment, they know the guaranty association rules, they know which carriers are actively writing business here.
Exactly. This isn’t a product category where you can really DIY your way to the right answer. The research you do ahead of time — understanding how rates are set, what surrender charges mean, what to look for in a carrier — that makes you a much better consumer when you sit down with an agent. But the agent is still the step you can’t skip.
I’m going to call my aunt and tell her to stop Googling and start that conversation.
Tell her to bring a list of questions. She’ll get a lot more out of that meeting if she walks in knowing what to ask.