CD Type Annuity: A CD Alternative
What is a CD-type annuity? The fact is there is really no such thing as a CD-type annuity. Multi-year guarantee annuities (MYGA), a type of fixed annuity, are oftentimes referred to as a CD type annuity because of the similarities between them and a CD.
A certificate of deposit (CD) is issued by a bank, whereas an annuity is issued by an insurance company. A CD-type annuity is essentially a CD that is issued by an insurance company instead of a bank.
So, when you hear somebody uses the term CD annuity or CD-type annuity, what they are typically referring to is a multi-year guarantee annuity (MYGA). Bank CDs and multi-year guarantee annuities are frequently compared because of the similarities between their product design and the way they credit interest.
Just like a bank certificate of deposit (CD), a multi-year guarantee or so-called CD type annuity credits a specific and guaranteed fixed interest rate for a set number of years. The interest rate and the number of years it will be applied are contractually guaranteed by the insurance company issuing the policy.
CD Type Annuity Rates
The below table lists our best CD Type annuity rates available today.
| Term | Insurer | Annuity | A.M. Best | Rate | |
|---|---|---|---|---|---|
| 2yr | SILAC | Secure Savings Elite | B+ | 2.15% |
| 3yr | American Equity | GuaranteeShield 3 | B++ | 2.10% |
| 4yr | Oceanview Life | Harbourview MYGA | A- | 2.60% |
|
| 5yr | SILAC | Secure Savings Elite | B++ | 2.95% |
| 6yr | Atlantic Coast Life | Safe Haven 6 | B++ | 2.87% |
| 7yr | Sentinel Security Life | Personal Choice | B++ | 2.90% |
| 8yr | Guaranty Income Life | Guaranty Rate Lock 8 | B++ | 2.75% |
|
| 9yr | Guaranty Income Life | Guaranty Rate Lock 9 | B++ | 3.00% |
|
| 10yr | Atlantic Coast Life | Safe Harbor | B++ | 3..01% |
Below are the Best CD Rates Available Today
Rates are as of January 27th, 2021, and retrieved from Bankrate.com.
First National Bank of America | 1.05 % | 6 yr
| $ 1,000
| $ 1,617 |
First National Bank of America | 1.00 % | 5 yr
| $ 1,000
| $ 1,275 |
First Internet Bank of Indiana | 0.96 % | 5 yr
| $ 1,000
| $ 1,223 |
Union Bank (Michigan) | 0.90 % | 5 yr
| $ 500
| $ 1,145 |
Comenity Direct | 0.90 % | 5 yr
| $ 1,500
| $ 1,145 |
CDs vs Fixed Annuity
The below table compares and contrasts some of the key similarities and differences between a CD and a multi-year guarantee annuity. The main difference is an annuity’s interest grows tax-deferred while the interest you earn in a CD is taxable in the year it is earned, regardless of whether or not you spend it.
| FIXED ANNUITY | CD (CERTIFICATE OF DEPOSIT) | |
|---|---|---|
| SOLD BY | Insurance Companies | Banks |
| AMOUNT YOU CAN INVEST | $2,000 - $1,000,000 | Essentially Any Amount |
| INVESTMENT DURATION | 3 years - 10 years | 3 months - 5 years |
| INTEREST RATES | Varies by insurer, term and investment amount. Typically higher than CDs | Varies by financial institution, term and investment amount. |
| LIQUIDITY | Varies by insurer and annuity. Usually either 10% of account value or accumulated interest annually. | Almost always accumulated interest. |
| GUARANTEES | Backed by the claims paying ability of issuing Insurer and by State Guaranty Funds. | Backed by the FDIC up to $250,000 per depositor, per institution. |
| DEATH BENEFIT | Asset passed directly to beneficiary without going through the probate process | Probate process required to pass asset to heirs |
CDs are Considered to be More Safe Than Annuities
Bank CDs are considered an extremely safe investment because the FDIC insures them up to $250,000.
Although annuities are not insured by the federal government, they’re also considered safe because they’re insured by the issuing insurance company and, in most cases, also by state guaranty associations. It is important to make sure your annuity is issued by a highly rated insurance company.
Annuities Almost Always Pay Higher Interest Rates than CDs
As seen in the tables above, annuity rates are typically higher than CD interest rates.
Annuities Grow Tax-Deferred while CD Interest is Taxable
Annuities grow tax-deferred while CDs do not. Tax-deferred growth means the interest compounds, so you earn interest on the funds that would have been used to pay taxes.
The IRS requires that the earnings on CDs not held in tax-preferred retirement accounts are taxed annually. This means you pay taxes on interest earned in a CD whether you spend it or not. To see the difference try this taxable vs tax-deferred investment calculator.
Both CDs and Annuities Offer Some Liquidity
Annuities are not as flexible as CDs, and they have higher penalties for early withdrawals greater than the contracts free withdrawal amount. Annuity annual free withdrawal amounts vary by company but are usually either 10% of the annuity account value or interest earned.
If you close a CD earlier than scheduled, the penalty you pay is lower than the penalty you would pay if you were to withdraw funds early from an annuity.
And whereas penalties for early withdrawals from a CD typically increase each time the CD is renewed, penalties for early withdrawals from an annuity are fixed.
In addition to the penalties imposed under the annuity contract, annuity owners under the age of 59½ must pay the IRS a penalty of 10 percent for early withdrawal from an annuity.
Annuity death benefits bypass probate while CDs do not
Annuities allow a surviving spouse access to the annuity funds without penalty. However, penalties apply to CDs in the event of the death of a spouse.
Annuity beneficiaries are not required to go through probate court in the event of the annuity owner’s death to claim their benefits.
If certificates of deposit are not placed in a living or irrevocable trust, heirs must go through probate if the CD owner dies.
