Why Annuities Are Better Than CD’s

by Michael on April 23, 2010

in 401K,Annuity,Retirement

Annuities and CDs (bank certificates of deposit) are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial institutions. The difference is that Banks issue CD”s and Insurance Companies issue Annuities.  But that is not where the difference ends.

(Have you ever wondered a Bank would sell Annuities for insurance companies even though the banks design and offer their own CD’s?)

Here are some of the reasons why …

Annuities offer everything CDs offer with some very real advantages …

  1. Generally Higher returns
  2. Tax-Deferral
  3. Liquidity

[CDs are insured by the FDIC (a branch of the government), while Annuities have safety measures in place by the state to ensure Insurance companies have reserve pools in place. Insurance companies are also generally rated by independent rating firms — i.e. A.M. Best, Standard & Poor’s, etc..]

Higher Returns:
Annuities, like CDs, pay interest. CD’s move with the market, as do Annuities, but Annuities have a minimum guarantee in place. Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates.

Again, low interest rates mean CD returns will be low as well. To offset the problem of low or falling interest rates, insurance companies equip annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your investment is assured not to fall below the minimum performance even if CD rates do.

Tax Treatment:

  • You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over.
  • Annuities also have  set term, however, … the earnings are tax-deferred. You only pay taxes on interest earned when money is withdrawn. So you defer taxes to a time when your tax rate is expected to be lower.


  • With CD’s, you may not withdraw money during the term that you agreed to.
  • Annuities are generally issued for longer terms than CD’s. However, annuities do have z provision that allow you to withdraw money, generally 10% of your account value annually without penalty, if you are 59 1/2 or older or have another qualifying event. In addition to this provision, many contracts allow you to remove money for many reasons, generally related in some fashion with health or other calamity. Each contract is different, so it’s important to ask this question.  Another advantage to annuities is that they often may be structured to pay-out over a period of time – even your lifetime! This spreads the tax burden and makes it much more manageable.  To sum it up, Annuities are flexible and are an excellent tool in a persons retirement planning.

Look over the chart below and then call me if you have money in a CD or even in a 401K or another Annuity. There is a very good chance that I can offer you something you will find more to your liking.

Bank CD Annuity
Loan privileges No YES (TSA products)
Flexible premium No YES
Avoidance of probate costs and delays No YES
Withdraw for dollar-cost-averaging opportunities No YES
Withdraw for required minimum distributions, penalty free No YES
Potential Social Security tax advantage No YES
Nursing Home Benefit No YES
Tax-deferred Growth No YES
Bonus available on premium No YES on some
Guaranteed lifetime income option No YES
Potentially higher yields No YES
Personal help from an insurance professional No YES

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