Tennessee Annuity Rates: A Plain-English Guide to Fixed Annuities

Tennessee Annuity Rates: A Plain-English Guide to Fixed Annuities

Wondering about Tennessee annuity rates and how fixed annuities work? This plain-English guide covers types, tax benefits, and what to ask a licensed agent.

Full written article: Tennessee Annuity Rates: A Plain-English Guide to Fixed Annuities

Tennessee Annuity Rates

Transcript

SPEAKER_00 0:03

Welcome to the Tennessee Annuity Show. I'm Jessica.

SPEAKER_01 0:06

And I'm Caleb. We break down complex annuity products in plain English, fixed annuities, indexed annuities, income annuities, all of it.

SPEAKER_00 0:13

We cover the products, the fine print, and the questions you should ask before you sign anything.

SPEAKER_01 0:18

Quick note before we start: this show is for general information only and is not financial, tax, or legal advice. Annuity guarantees depend on the issuing insurance company's ability to pay claims. Talk with a licensed professional before making decisions about your retirement income.

SPEAKER_00 0:33

All right, let's get into today's episode. So I had a conversation with my aunt a few weeks ago. She's 68, lives outside Knoxville, just finished paying off her house. And she said, Jessica, I keep hearing about annuity rates, but I have no idea if that's something I should even be looking at. And honestly, I didn't have a clean answer for her in the moment.

SPEAKER_01 0:58

That's such a common place to be. The word annuity gets thrown around, and it means like five different things depending on who's saying it.

SPEAKER_00 1:05

Right. And she's not unsophisticated. She had a career, she's got a 401k, she's done the basics. But annuities just feel like this separate, confusing category.

SPEAKER_01 1:17

So let's just start at the foundation. Uh a traditional fixed annuity is an insurance contract, not a brokerage account, not a mutual fund, an insurance contract. You give money to an insurance carrier, they credit a fixed interest rate to your account, and that growth is tax deferred until you take it out.

SPEAKER_00 1:34

And when you say fixed rate, you mean the carrier just tells you up front this is the rate you're getting?

SPEAKER_01 1:41

Exactly. It's called a declared rate, and it's set by contract. So if the stock market has a terrible year, your account value doesn't drop. The rate is what the rate is.

SPEAKER_00 1:50

Okay, that's the part my aunt kept coming back to. She said, I just want something that doesn't go backwards.

SPEAKER_01 1:57

And that's genuinely what a fixed annuity is designed to do during the accumulation phase. Your principal isn't exposed to market swings. Now there are trade-offs. We'll get into those. But that stability is the core value proposition for a lot of retirees in Tennessee.

SPEAKER_00 2:13

So walk me through how it actually works. Like mechanically, you hand over money, then what?

SPEAKER_01 2:19

So typically you make a lump sum payment, though some contracts allow a series of payments. The carrier takes that money, they invest it on their end, mostly in bonds and fixed income instruments, and they credit a rate to your account. You don't owe income tax on that growth while it's sitting inside the contract.

SPEAKER_00 2:35

And then at some point you have to decide what to do with it.

SPEAKER_01 2:38

Right. That's the payout phase. You've got options. You can take systematic withdrawals, you can convert the contract into a stream of income that lasts for the rest of your life. Or if you pass away before you've used it all, the remaining value goes to whoever you named as beneficiary.

SPEAKER_00 2:54

The lifetime income piece is the one that really gets people's attention, I think.

SPEAKER_01 2:59

It does. And it's also the part that's hardest to wrap your head around because you're essentially asking an insurance company to take on the risk that you live a very long time, which honestly is a legitimate risk to manage.

SPEAKER_00 3:10

Okay, so there's more than one type of fixed annuity, right? Because I know people use that term loosely.

SPEAKER_01 3:15

Yeah, there are really three main types you'll run into when you're comparing Tennessee annuity rates. The first is what I'd call a plain fixed interest annuity, declared rate, set term, pretty straightforward. The second is a fixed indexed annuity, which is a little more complex. And the third is a single premium immediate annuity, which is its own thing entirely.

SPEAKER_00 3:36

Let's take those one at a time, the plain fixed one first. People compare those to CDs a lot, right?

SPEAKER_01 3:43

They do, and it's not a crazy m comparison. Both offer a set rate, both protect your principal from market losses. But there are real differences that matter.

SPEAKER_00 3:52

Like what?

SPEAKER_01 3:52

The big one is lifetime income. A CD cannot pay you income for the rest of your life. A fixed annuity can be structured to do that. Second is tax treatment. CD interest is taxable in the year you earn it. Annuity interest is tax deferred until you take it out.

SPEAKER_00 4:09

Which is a meaningful difference if you're sitting in a higher bracket during your working years and you expect to be in a lower bracket in retirement.

SPEAKER_01 4:18

Exactly. And then there's the insurance backing question. CDs are FDIC insured up to $250,000 per depositor. Annuities aren't FDIC. They're backed by the claims paying ability of the insurance company. And in Tennessee, they're also covered by the Tennessee Life and Health Insurance Guarantee Association up to certain limits.

SPEAKER_00 4:38

That's a thing a lot of people don't know about the Guarantee Association.

SPEAKER_01 4:43

It's not FDIC and you shouldn't treat it the same way, but it's not nothing either. It's a backstop. The point is, if you're comparing a fixed annuity to a CD, you can't just look at the rate. You have to understand the structure.

SPEAKER_00 4:54

What about liquidity? Because that's the thing my aunt kept asking. What if I need the money?

SPEAKER_01 5:00

Both products have early withdrawal penalties, but they work differently. With a CD, you typically forfeit some interest. With an annuity, you're dealing with surrender charges, which are usually a percentage of your contract value, and they decline over time. Like a seven-year surrender schedule might start at 7% and step down to zero.

SPEAKER_00 5:18

So if you need all your money in year two, you're gonna feel that.

SPEAKER_01 5:22

You will. Most contracts do have a free withdrawal provision, often 10% of your account value per year without a charge. But if you need more than that during the surrender period, yes, there's a cost.

SPEAKER_00 5:35

So for your aunt, if she might need that money in the next year or two, probably not the right fit.

SPEAKER_01 5:41

Right. Fixed annuities are really built for money you don't need immediate access to. That's an important suitability question.

SPEAKER_00 5:47

Okay, let's talk about the fixed indexed annuity. Because that's the one I feel like gets the most confusing explanations.

SPEAKER_01 5:54

It does. Uh and I think it's because people hear indexed to the S P five hundred and they think they're buying stocks. They're not.

SPEAKER_00 6:01

Right. That's the misconception.

SPEAKER_01 6:03

Aaron Powell The Index is just a measuring stick. The carrier uses the performance of an index, could be the S P five hundred, could be something else, to calculate how much interest to credit to your account. But you don't own any stocks or mutual funds. And critically, if the index goes down, your account doesn't go down with it.

SPEAKER_00 6:20

There's a floor.

SPEAKER_01 6:21

There's a floor, usually 0%, meaning you don't gain, but you also don't lose due to index declines. The trade-off is there's also a ceiling. Carriers use caps, participation rates, spreads. These are the mechanisms that limit how much of the index is upside you actually capture.

SPEAKER_00 6:36

So if the index is up 20% in a year, you're not getting 20%.

SPEAKER_01 6:41

Almost certainly not. You might get 8 or 10 or 12, depending on the cap and the participation rate in your specific contract. That's why you really have to read the contract terms, not just the headline rate.

SPEAKER_00 6:52

And those terms can change at renewal.

SPEAKER_01 6:54

They can. Carriers can adjust caps and participation rates at renewal. That's a detail a lot of people gloss over and then feel surprised by later.

SPEAKER_00 7:02

Okay, the third type. The single premium immediate annuity. That's the one where you just hand over a lump sum and they start sending you checks?

SPEAKER_01 7:10

Basically, yeah. You give the carrier a lump sum, and income payments can start within 30 days. It's popular with people who are already in retirement and want to convert a chunk of savings into something that functions like a paycheck.

SPEAKER_00 7:23

The I can't outlive this appeal?

SPEAKER_01 7:25

Exactly. The rate you get on an immediate annuity depends on your age, the carrier, and the payout option you choose. Like you whether you want payments for life only, or life with a certain period guaranteed, or joint life for you and a spouse.

SPEAKER_00 7:40

The spouse piece matters a lot. I talked to a couple in Nashville, both 65, they had about a hundred thousand dollars they were thinking about deploying. And their whole question was what happens to the income if one of us dies first?

SPEAKER_01 7:55

That's the right question. A joint life payout option means the income continues as long as either of them is alive. You get a lower monthly payment than a single life option. But you're covering both people. That's a real trade-off worth modeling out.

SPEAKER_00 8:09

Let's talk about the Tennessee specific tax angle, because this is one I actually didn't fully understand until recently.

SPEAKER_01 8:16

So Tennessee is actually a pretty favorable state for retirees from a tax standpoint. There's no state income tax on wages and the hall income tax, which used to tax interest and dividends, that was fully repealed as of 2021.

SPEAKER_00 8:28

So you're not getting hit at the state level on annuity withdrawals.

SPEAKER_01 8:32

Right. You still have federal income tax to deal with. When you take withdrawals, the earnings portion is taxed as ordinary income at the federal level. But you're not also paying Tennessee state tax on top of that.

SPEAKER_00 8:42

Which is different from a lot of states.

SPEAKER_01 8:45

Very different. Some states have income taxes in the five to seven percent range on retirement income. Tennessee residents don't have that. So the combination of federal tax deferral during accumulation and no state income tax on the back end, but that's actually a meaningful advantage over a long period.

SPEAKER_00 9:00

Now I want to flag, and I know you'd say this too. Um that's not personalized tax advice. If you're making decisions based on your tax situation, you need to talk to an actual tax professional.

SPEAKER_01 9:13

100%. The general framework is accurate, but everyone's situation is different. And if you're under 59 and a half and you take money out of an annuity, there's also a 10% federal early withdrawal penalty on top of ordinary income tax. So the tax deferral benefit is really designed for people who can leave the money alone.

SPEAKER_00 9:32

Okay, I want to spend a few minutes on riders because I feel like this is where contracts get complicated fast.

SPEAKER_01 9:37

Riders are add-ons. Some are automatic, some are optional, that modify what the contract does. Two that come up a lot with fixed annuities are the convalescent care writer and the terminal illness writer.

SPEAKER_00 9:48

The nursing home one.

SPEAKER_01 9:49

Right. So the convalescent care or nursing home writer typically says if you're confined to a nursing home for a certain period, usually 30 or more consecutive days, you can take an additional withdrawal above your normal free withdrawal amount without a surrender charge.

SPEAKER_00 10:03

That's actually a pretty meaningful provision if you're worried about long-term care costs.

SPEAKER_01 10:08

It can be, but here's where I'd push back on treating it as a long-term care solution. It's not. It's a surrender charge waiver. It doesn't pay for your care, it just lets you access your own money without the penalty. There's a difference.

SPEAKER_00 10:22

That's a really important distinction. I could see someone thinking, oh, I've got nursing home coverage when really they just have easier access to their own funds.

SPEAKER_01 10:31

Exactly. Read the writer language. Um ask your agent to walk through the conditions. There are often waiting periods, eligibility requirements, definitions of what qualifies. The details matter.

SPEAKER_00 10:44

And the terminal illness writer?

SPEAKER_01 10:46

Similar concept. If a physician certifies a terminal diagnosis with a life expectancy of 12 months or less, the writer typically allows a one-time accelerated withdrawal, often up to a percentage of the contract value, without a surrender charge.

SPEAKER_00 11:00

So in a really difficult situation, you're not stuck waiting out a surrender period.

SPEAKER_01 11:04

Right. And again, terms vary by carrier and by state. These riders have to be approved in Tennessee specifically. So what's available in one state might not be available here or might work slightly differently.

SPEAKER_00 11:15

Let's talk about how rates are actually set, because I think people assume there's like one Tennessee annuity rate, the way there's a federal funds rate.

SPEAKER_01 11:24

There really isn't. Each carrier sets their own declared rate based on what they're earning on their own portfolio, mostly bonds. So when interest rates broadly go up, annuity rates tend to follow because carriers can earn more on new bonds they're buying.

SPEAKER_00 11:37

And when rates fall?

SPEAKER_01 11:39

New contracts tend to offer lower rates.

SPEAKER_00 11:51

How meaningful are we talking?

SPEAKER_01 11:53

On a five-year contract, the difference between a carrier offering, say, four and a half percent and one offering five and a half percent on a hundred thousand dollars, that's real money over five years. We're talking potentially several thousand dollars in additional credited interest.

SPEAKER_00 12:08

Which is why you don't just go with the first carrier you find.

SPEAKER_01 12:12

That's why working with an independent agent who can pull quotes from multiple carriers matters. A captive agent, someone who only represents one company, can only show you what that one company offers.

SPEAKER_00 12:23

And rates change frequently.

SPEAKER_01 12:24

Frequently, sometimes weekly. What I quoted someone in January might not be the rate in March. So the research you do online is a starting point, not a final answer.

SPEAKER_00 12:32

Okay, so who is this actually right for? Because I don't want people to walk away thinking fixed annuities are for everyone.

SPEAKER_01 12:39

They're not. The the profile that makes the most sense is someone who's within, let's say, five to fifteen years of retirement, who has a portion of savings they want to protect from market volatility, and who is thinking about how to generate income they can't outlive.

SPEAKER_00 12:53

Or someone who's already maxed out their 401k and IRA and wants more tax-deferred growth.

SPEAKER_01 12:59

That's a real use case. Uh there's no contribution limit on a non-qualified annuity uh the way there is on an IRA. So for someone who's already maxed out those buckets, an annuity can be a way to continue deferring taxes on growth.

SPEAKER_00 13:11

Aaron Powell What about the beneficiary angle? Because I know that came up with my aunt. She wanted to make sure her kids would get something.

SPEAKER_01 13:19

Fixed annuities passed to a named beneficiary outside of probate. So the remaining contract value goes directly to whoever you you named without going through the uh court process. So for a lot of families, that's a be a meaningful simplification.

SPEAKER_00 13:33

It's not a will substitute, but it handles that particular asset cleanly.

SPEAKER_01 13:37

Right. And it's worth coordinating with an estate planning attorney to make sure your beneficiary designations are consistent with the rest of your plan.

SPEAKER_00 13:44

Who is it probably not right for?

SPEAKER_01 13:45

Anyone who needs immediate access to all of their funds. If there's a real chance you need that money in the next year or two, the surrender charge structure is going to create a problem. Fixed annuities are not liquid vehicles.

SPEAKER_00 13:56

Aaron Powell I had a neighbor, 62, just retired, who bought a five-year fixed annuity and then six months later had an unexpected home repair situation. And he had the free withdrawal provision so he could get 10% out without a charge. But he needed more than that, and it cost him.

SPEAKER_01 14:16

That's the real world version of the liquidity conversation. It's not hypothetical. The free withdrawal provision helps, but it's not a full emergency fund. You need liquid assets outside the annuity.

SPEAKER_00 14:27

Which is something a good agent should be asking about before you sign. Do you have other liquid savings?

SPEAKER_01 14:33

That's exactly what a suitability review is supposed to surface. A licensed agent who's doing their job is going to look at your full picture, your income, your expenses, your other assets, your timeline before recommending any product.

SPEAKER_00 14:45

And that's not just good practice, it's actually required.

SPEAKER_01 14:48

It's a regulatory requirement. Suitability and increasingly best interest standards mean the agent has to be able to document why this product made sense for this person. It's not just a sales conversation.

SPEAKER_00 15:00

So if someone's listening to this from Nashville or Memphis or Knoxville and they're thinking, okay, I want to actually look at this. What's the move?

SPEAKER_01 15:09

Talk to a licensed annuity agent who is appointed in Tennessee. That's the starting point. Not someone who's going to show you one product from one company, but someone who can pull quotes from multiple carriers and walk you through the differences.

SPEAKER_00 15:22

And come prepared. Know roughly how much you're thinking about putting in, know your timeline, know whether you have other liquid savings.

SPEAKER_01 15:31

And know what you're trying to solve for. Is it tax deferral? Is it uh income you can't outlive? Is it protecting a specific chunk of savings from market swings? The answer shapes which type of contract even makes sense to look at.

SPEAKER_00 15:44

Because a fixed indexed annuity and a single premium immediate annuity are solving pretty different problems.

SPEAKER_01 15:51

Aaron Powell Very different. One is an accumulation tool, one is an income tool. Conflating them is where people get confused.

SPEAKER_00 15:58

I feel like that's the meta lesson here. The word annuity covers a lot of ground, and you have to get specific about what you're actually talking about before any comparison makes sense.

SPEAKER_01 16:08

That's exactly right. And honestly, that's why doing some reading first. Understanding the vocabulary, understanding the basic mechanics makes the conversation with an agent so much more productive. You're not starting from zero.

SPEAKER_00 16:22

You know what to ask.

SPEAKER_01 16:23

You know what to ask. And you know when an answer doesn't quite add up.

SPEAKER_00 16:31

That's it for today's Tennessee Annuity Show.

SPEAKER_01 16:33

If you have questions about your specific situation, talk to a licensed advisor.

SPEAKER_00 16:37

Visit Tennessee AnnuityRates.com for show notes or to get matched to an advisor.

SPEAKER_01 16:42

We'll see you next time.