Annuity Rate
- Determines the income stream an annuity pays and depends on contract structure rather than being a single market rate.
- Influenced by annuity type (fixed, variable, indexed), the length of the term, and the performance of underlying investments.
- Can change with market conditions and should be compared along with contract terms before purchase.
Definition
Section titled “Definition”Annuity rate is the rate of interest earned on an annuity, a financial product that provides regular payments over a set period of time. It is determined by the underlying investments within the annuity, the length of the annuity term, and the type of annuity being purchased.
Explanation
Section titled “Explanation”Annuity rates vary by annuity type and contract design:
- Fixed annuities: the insurer sets a guaranteed interest rate at purchase that remains constant through the annuity term. The insurer assumes the risk of providing the steady income stream.
- Variable annuities: the annuity rate is tied to the returns of the underlying investments (for example, mutual funds or other securities) and can fluctuate over time, so income may rise or fall with investment performance.
- Indexed annuities: the annuity rate is linked to the performance of a specific market index (for example, the S&P 500). Indexed annuities commonly include a minimum guaranteed floor and may impose caps on potential gains.
Term length affects the annuity rate: different term lengths (for example, a 10-year term versus a 5-year term) and differing investment outcomes can produce materially different income streams. Market conditions such as changes in general interest rates or the performance of underlying investments also affect annuity rates.
Examples
Section titled “Examples”Rate comparison example
Section titled “Rate comparison example”A fixed annuity with a 10-year term and a 3% interest rate may offer a higher income stream than a variable annuity with a 5-year term and investments that have performed poorly in recent years.
Buyer choice example
Section titled “Buyer choice example”A retiree seeking a steady income stream may choose a fixed annuity with a longer term and a higher interest rate to provide a higher income stream. A younger individual saving for a future expense may choose a variable annuity with a shorter term and investments that have the potential for higher returns, accepting some market volatility.
Use cases
Section titled “Use cases”- Providing a steady stream of income during retirement.
- Saving for future expenses such as a child’s education.
- Saving for a large purchase.
Notes or pitfalls
Section titled “Notes or pitfalls”- Annuity rates can vary widely by type, term length, and underlying investments; compare rates and contract terms carefully before purchasing.
- Market conditions affect annuity rates: rising interest rates can increase fixed annuity rates, while poor performance of underlying investments can decrease rates for variable annuities.
Related terms
Section titled “Related terms”- Fixed annuity
- Variable annuity
- Indexed annuity
- Underlying investments
- Interest rate