# How do insurance annuities work

**Method of Calculation - Account Value**

**Projected Account Value and Yield to Surrender for Fixed Annuities**

Utilizing the calculations **" Current Yield to Surrender** SM

**and**

**Guaranteed Yield to Surrender**SM it is now possible to compare the interest rates paid on a fixed annuity in a meaningful way.

**We project the dollar accumulations and the yield calculation based on the following assumptions.** **One** **can compare the current interest rate and guaranteed interest for any annuity product by using the number of years the surrender charges last as the common denominator for the comparison.**

**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 "renewal rates" which are less than the originally projected base rate .** Note 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 of 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 calculate the projected "Account Value" for only seven years. The

reason is after the surrender charge expires the interest rate is dropped to the contractual guaranteed minimum and the policy values are usually transfered to another annuity. To continue projecting the accumulated value beyond this point is meaningless.

**Most annuities allow you to withdraw interest from your annuity without penalty. Some annuities allow you to withdraw interest without paying a penalty at the end of the policy year, or after 30 days.**

**Almost 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.**

**We have created a general calculation which we have coined " Yield to Surrender ". Essentially that is the annualized yield (accumulated dollar value) of the annuity calculated over the time the surrender charges can be applied against withdrawals from the account value. The Yield to Surrender can be calculated on a "current basis" or "guaranteed basis".**

**Current Yield to Surrender** SM

This is the yield based on the first year **current** interest rate and any number of successive years in which the interest rate is guaranteed. Then the calculation uses the **base rate** through the last year in which the surrender charge applies.

**Guaranteed Yield to Surrender** SM

This yield is calculated only using the guaranteed interest rate for each year through the last year in which the surrender charge applies.

In the category of "Multi-Year Annuities" the **Current Yield to Surrender** SM is also the **Guaranteed Yield to Surrender**. SM The interest rate is guaranteed for every year in which a surrender charge exists.

Category: Credit

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