What You Need to Know about Annuity Interest Rates

Let’s get right to the point. You want to know about annuity interest rates when it comes to annuities for retirement as well as what your investment is going to bring you in the future. 

In this guide, you'll find out all about various aspects of annuity interest rates including the assumed interest rate of a variable annuity, how ordinary annuity interest rates are calculated, and even how to find the best-fixed annuity interest rates. 

But in the end, having the right financial expert in your corner to guide you through the next steps is key. That's where an independent insurance agent comes in.

Independent insurance agents can explain more about an annuity's interest rate, how it's discovered, and how much you’ll receive during your payout phase. They know all the ins and outs of the annuity scene and can help make sure you're putting your money into the right investment for you. 

What Is the Assumed Interest Rate of a Variable Annuity Contract?

To begin, a variable annuity’s interest rate is also called the assumed interest rate (AIR). The AIR is used to determine the value of an annuity contract by insurance companies. Ultimately, this affects the payouts you get from the insurer. The higher the assumed interest rate, the higher the payout for the policyholder.

Because insurance companies still have profit margins that need to be met and costs to be covered, the AIR is the minimum interest rate that must be earned on investments in the policyholder's account. Bear in mind that the AIR is not a guaranteed rate of return — hence the "assumed" part. 

Instead, the assumed interest rate is an earnings "target" the insurer sets for the annuity. To maintain payment levels, the account must meet or exceed this earnings target. If performance falls below the AIR, payments will decrease during the payout phase of the annuity contract unless there are guaranteed minimum payouts already laid out in the contract.

Why the Assumed Interest Rate Is Important

The AIR is only relevant during the payout phase of the contract when the policyholder is getting their regular payments. As an investor, knowing the AIR plays a substantial part in planning for your retirement years so you know how much you can expect to receive from an annuity which:

What Factors Influence the Assumed Interest Rate?

There are a number of key influences on how an assumed interest rate is determined, including:

Example of an Assumed Interest Rate

An annuity payment is based on the number of annuity units owned by the policyholder multiplied by the annuity unit value. The minimum guaranteed payment is tied to the assumed interest rate, so the policyholder can receive additional payments if the annuity's underlying assets outperform expectations.

As an example, assume a variable annuity where the policyholder receives a minimum guaranteed payout. An assumed interest rate of 4.5% on the account’s principal of $1 million would obviously generate larger minimum payouts than an annuity performing at 2%. But the insurer would still have to provide payouts at the assumed interest rate of 4.5%, even at lower AIRs. 

How to Calculate the Interest Rate in an Ordinary Annuity

Ready for some math? Great. Here's what it takes to calculate the interest rate in an ordinary annuity. 

To begin, here are a few key variables:

Ultimately, to calculate the interest rate in an ordinary annuity, the equation is expressed A = P(1 + rt).

How did we get here? 

Because the interest rate of a variable annuity changes annually, it can be difficult to predict how much your annuity will ultimately pay out. But you can use the assumed interest rate to get a ballpark estimate of how much you’ll receive. 

If this seems a bit complicated, you’re not alone. Thanks to the fact that many online calculators now exist and can be customized to your specific attributes -— age, amount invested, etc. — it’s no longer necessary to know how to calculate an annuity interest rate in Excel or do guesswork when it comes to your future finances. 

And an independent insurance agent can help you fill in any holes because they're trained in the world of confusing financial matters and can simplify your expected rates of return. They can also help you compare multiple policies and provide accurate estimates so you can choose a policy that makes sense, even if math isn't your thing.

Fixed-Rate Annuities Interest Rates

If you’re concerned about the risk that comes with a variable annuity's rate of return, you may want to consider a fixed-rate annuity with a locked-in interest rate. Today, the guaranteed rate of return averages between 3%-4% annually depending on the guaranteed period you select.

As of this publication, the following companies offer fixed-rate annuities with top-performing rates:

Top 2019 Fixed Annuities: 3-Year Term

Top 2019 Fixed Annuities: 5-Year Term

Top 2019 Fixed Annuities: 7-Year Term

Top 2019 Fixed Annuities: 10-Year Term

How to Find the Annuity Interest Rate

Insurance companies that offer annuities usually make it easy to find the annuity interest rate through instant online quotes and calculators. You can even sometimes compare multiple policies by plugging in information related to you and your desired annuity, like:

Bear in mind, though,  that there’s more to the performance of the annuity that determines how much a policyholder will actually receive. Some factors that will reduce payouts include:

As you can see, there are many aspects to consider when finding the right interest rate of an annuity. To get help, an independent insurance agent is a must-have weapon to have on your side. 

What's So Great about Independent Insurance Agents?

Insurance and annuities are complex, and searching through options can be confusing, time-consuming, and frustrating. An independent insurance agent's role is to simplify the process.

They'll make sure you get the right coverage for your own unique needs and break down all the jargon so that you understand exactly what you're getting.