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What Are Annuity Rates and How Are They Set?

You’re preparing for retirement and wondering if you should invest in annuities. These insurance products are investments designed to bolster your retirement in order to provide you with a regular, guaranteed income for the remainder of your life. 

Annuities can be a great investment, however, purchasing them should not be taken lightly. There are multiple factors to understand and consider when investing in annuities, one of which is annuity rates. 

What are Annuity Rates?

Understanding annuity rates is essential so that you are set to make the best decisions regarding your investments. An annuity rate is the rate, or percentage, that an annuity grows annually. They are related to current interest rates and can vary between insurance companies. 

There are two main categories of annuities that affect the rate; fixed and variable. The majority of annuities are fixed, with a variety of rate types falling into the category. 

A fixed annuity’s premium compounds are at a fixed interest rate, while a variable annuity’s premium can increase or decrease in value. This increase-decrease happens depending on the mutual fund account’s performance. 

Annuity rates tend to mirror bond interest rates. With a variable annuity, the annuity rates tend to rise and fall as bond interest rates rise and fall. 

Fixed annuities provide you with the most stability and freedom because you have security when it comes to your rate and won’t be taken by surprise due to a sharp increase. 

With a variable annuity, you could see your rates rise or drop over time, preventing continuity. 

Most insurance companies focus on fixed rate annuities, offering higher rates on multi-year guaranteed annuity products. 

Fixed Annuity Rates

As the most common annuity, fixed annuities are offered in a few different types depending on the insurance company. The type of fixed annuity purchased may affect the rate you receive. 

Fixed Immediate Annuities

When purchasing a fixed immediate annuity, you will receive a fixed, or set, stream of income for the rest of your life. With this option, you pay a portion of the original principle along with earned interest every month. 

Income is produced through this annuity as the principle is liquidated. Monthly payments tend to be higher with an immediate annuity because you are getting part of the underlying investment as opposed to only receiving the interest earned from your investment. 

The income streams from immediate annuity accounts can be set up to be paid out for a specified amount of time or for lifetime payments. These payments can be given to you monthly, quarterly, or annually, depending on your preferences. 

Deferred Fixed Annuity Rates

Deferred fixed annuities are similar to bank certificates of deposit. Insurance companies who offer these rates quote them as an effective annual yield, giving you the opportunity to choose a guaranteed income period. Choosing a longer period will likely get you a higher annuity rate. 

The main difference between a deferred annuity and immediate annuity is that deferred annuity rates tend to be set around the length of time you choose to hold your annuity, while immediate annuity rates are set based on a variety of other factors. 

Fixed Index Annuity Rates

Similar to deferred fixed annuities, fixed index annuities differ in rate because their growth annually is connected to a benchmark stock index. The rates of these annuities may have caps and floors, preventing the rate from rising or falling too far. Fixed index annuities typically have a cap and floor difference between three and seven percent, depending on the insurance company. 

How are Immediate Annuity Rates Set?

Annuity rates for immediate annuities are set based on a number of factors. These factors include the type of payment stream, your age, your life expectancy, your gender, the amount of money that you invest, along with any extra features you may choose to purchase. 

When you buy an annuity, your rate will be set by the insurance company that you purchase from. Many insurance companies use detailed, complex calculations which are difficult to understand. 

Make sure to ask your broker to explain how they calculate rates and to confirm that your rate will stay fixed throughout the annuity’s duration. The only annuity rates that should fluctuate are those of variable annuities, which decrease and increase because of underlying investments. 

If you need help, let us know and we’ll connect you with an annuity pro.

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