Bonus Teaser Rates
As discussed earlier, one type of Fixed Annuity is the Bonus Annuity where a higher interest rate is paid, for example, in the first year followed by a decreasing rate in year two. Bonus Annuities are appropriate as long as the consumer knows that the rate will decrease. In the opinion of many, a Bonus Annuity or any Fixed Annuity should NOT be selected when interest rates are low in anticipation that the insurer will increase interest rates if rates rise. Generally speaking, an insurer receives premiums and reinvests these premiums often in bonds paying a fixed interest rate. The only way for that insurer to obtain new higher interest rates is to sell the bond and reinvest. But what happens to a bond when interest rates rise, they decrease in value. In other words, an insurer, generally speaking, cannot keep pace in an increasing interest rate environment. Conversely, an insurer generally speaking, should maintain interest rates (to a certain extent) during a level or decreasing interest rate environment. Again, the importance of diversification surfaces again. Allocate your dollars so that a percentage of your dollars are protected if interest rates are level, increase, or decrease and a fixed annuity can help you in two of these three scenarios.