Annuity Interest Rates & Calculation

(Discover exactly what you're getting back from your investment)

Written by Tom Senkus
Written by Tom Senkus

As a writer and research for over two decades, Tom Senkus shares his expertise on such topics as financial planning, insurance, telecommunications, and more. His work has been featured in over 150 publications.

Mature couple smiling while calculating annuity interest rates together

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:

  • Provides security in non-working years 
  • Is an estimate of funds available for further investments 
  • Carries an expected tax liability when you intend to make withdrawals from the annuity 

What Factors Influence the Assumed Interest Rate?

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

  • The policyholder’s age when the annuity pays out, known as annuitization
  • Spousal coverage options
  • Policy riders, such as a death benefit
  • The type of annuity coverage chose

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. 


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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:

  • A = Total accrued amount (principal + interest)
  • P = Principal amount
  • I = Interest amount
  • r = Rate of interest per year in decimal; r = R/100
  • R = Rate of Interest per year as a percent; R = r * 100
  • t = Time period involved in months or years

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

Annuity formula

How did we get here? 

  • First, we found the total accrued amount (principal + interest), which is A = P + I 
  • Next, interest amount is expressed as I = Prt
  • Combining these formulas, we get A = P + Prt, which is simplified as A = P(1 + rt).

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

Company Rate Earnings on a
$100,000 Investment
Liberty Bankers Life 3.10%      $9,591
Sagicor Life 3.05% $9,432
Brighthouse Financial 3.00% $9,273
The Standard 3.00% $9,273
Delaware Life 3.00% $9,273
Guggenheim 3.00% $9,273

Top 2019 Fixed Annuities: 5-Year Term

Company Rate Earnings on a
$100,000 Investment
Equitable Life 4.10%      $22,251
Atlantic Coast Life 4.00% $21,665
Sentinel Security Life 4.00% $21,665
Equitable Life 4.00% $21,665
Phoenix (Nassau Re) 3.85% $20,790
Sagicor Life 3.75% $20,210

Top 2019 Fixed Annuities: 7-Year Term

Company Rate Earnings on a
$100,000 Investment
Atlantic Coast Life Insurance C 4.19%      $33,306
Sentinel Security Life 4.10% $32,481
Fidelity & Guaranty Life 4.00% $31,593
Phoenix (Nassau Re) 3.95% $31,151
Sagicor Life 3.85% $30,270
Liberty Bankers Life 3.80% $29,832

Top 2019 Fixed Annuities: 10-Year Term

Company Rate Earnings on a
$100,000 Investment
Atlantic Coast Life Insurance Company 4.30%      $52,344
Sentinel Security Life 4.20% $50,896
American National 3.75% $44,498
Oxford Life 3.65% $43,118
Delaware Life 3.55% $41,743
AIG 3.50% $41,060

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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:

  • Amount invested
  • Current age
  • Withdrawal age
  • Annual contribution
  • Expected rate of return
  • Term of the annuity contract

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:

  • Surrender charges
  • Administration fees
  • Surcharges
  • Commissions
  • Taxes

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. 


Get Annuities from the Experts

Our independent agents shop around to find you the best coverage.

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.

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