CD Type Annuity

A CD type annuity is also termed as a fixed rate annuity. Similar to a certificate of deposit it provides a guaranteed fixed interest rate that is set for a pre-specified number of years. Since a CD type annuity provides safety of principal, a competitive interest rate and significant tax advantages, they are an ideal choice for the safety-first part of a retirement plan.

CD-type annuities have a very big advantage that they are fixed-rate annuities. Various fixed annuities other than CD-type annuities offer the fix rate but for just first year of the annuity period. In those fixed rate annuities their is not any maturity date and the rate of interest may or may not declines after the guaranteed year and adjusted every year or annually. On the other hand CD-type annuities provide fixed-rate for the whole time-period of plan. For example if one invests in CD-type annuity for 5 years at a rate of 7 percent, then the annuitant will get 7 percent annually for whole 5 years if the CD is held for 5 years.

CD-type annuities were made to overcome the problem of investors or to provide the safety to the investors against the fake promises made by the insurers regarding the high rate of interest that will be paid after the guaranteed period as well. Generally rates fell down and the customers were not satisfied with the promises of insurers and were not getting the desired or expected results. Ultimately the customers had to pay a penalty amount for opting out from the investment.

Bringing Bank CDs under consideration, these are the CDs which does not provide tax-deferred feature unless they are held in a tax-deferred account. Finally in the case of CD-type annuities if the annuitant or investor withdraws or quit out from the 5 year CD annuity before age 59½, then he/she will also have to pay a penalty amount up to a pre-specified limit.