How annuities really work?
Interest Rates When an annuity policy is issued the company sets the first year interest rate. This rate is guaranteed for the first policy year and we refer to it as the current rate. The base rate is that interest rate which the company projects it will pay in the second year and thereafter. This base rate is also referred to as the "renewal rate" is not guaranteed. In fact some companies pay a "renewal rates" which are less than the originally projected base rate. Note the the difference between the current rate and the base rate is referred to as the bonus rate. We use the Current Rate (for the first year) and the Base Rate (for each year thereafter) in our formula to calculate the projected "Account Values." Surrender Charges, Withdrawal Charges The surrender charges last for a period years and we calculate the projected "Account Value" for the number of years the surrender charges exist. For example; if the surrender charge of the policy lasts seven years, we calculated the projected "Account Value" for only seven year. The reason is the after the surrender charge expires the interest rate is dropped to the contractual guaranteed minimum and the policy values are usually transfer to another annuity. To continue projecting the accumulated value beyond this point is meaningless. Most annuities allow you to withdrawn interest from your annuity without penalty. Some annuities allow you to withdraw interest with out paying a penalty at the end of the policy year or after 30 days, then as earned. All most all annuities allow you to withdraw up to 10% of the account value before a surrender charge or withdrawal charge is applied. YOU must know how the Withdrawal or Surrender Charges apply before buying an annuity policy to save yourself unnecessary expenses
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