Comparing CDs and Annuities

What You Need to Know

CDs and annuities can both keep money safe.
Some products could offer a higher rate of return.
Some products could hit harder if a client takes cash out early.

Bank certificates of deposit, or CDs, and annuities are two popular and safe investment options that can provide a steady income stream for investors.

Both have advantages and disadvantages that depend on a client’s financial goals, time horizon, and risk tolerance.

Rising interest rates have suddenly made both types of products much more attractive.

Here’s a look at how the products work, along with the typical profiles of clients who tend to benefit the most from each type of product.

CDs Basics

CDs are deposit accounts offered by banks. They have  a fixed interest rate and a fixed “term,” or length of time that the account lasts.

When the term ends, your client receives the original deposit plus the interest earned.

CDs typically offer higher interest rates than regular savings accounts.

They’re FDIC-insured, making them one of the safest places for your clients to put their money.

The main downside of CDs is the lack of flexibility; withdrawing funds before the maturity date results in penalties.

Also, the returns, though guaranteed, may not outpace inflation.

CDs are ideal for conservative investors seeking a low-risk way to grow their savings over a specific period.

Annuity Basics

Annuities are insurance products that pay out income based on an investment the client made with an insurance company.

Annuities are designed to provide a steady income during retirement. They offer a guaranteed income stream for life or a specified period.

A life annuity can provide a hedge against clients outliving their income.

Some policies also offer potential for growth linked to the performance of investment markets or bonds. These products can be riskier than other annuities, but clients are guaranteed a minimum payment.

Annuities can be complex, with high fees and surrender charges for clients who withdraw funds early.

Riders can eat away at clients’ annuity earnings, without providing useful benefits in returns, if clients are not careful about picking only the riders they need.