Annuity Rates

When considering interest rates, figures from annuity providers are useful when choosing between annuities, but not when comparing annuities to other types of investments.

That’s because of the unique nature of annuities, which are really insurance policies different from other investments. Unlike other investments, quoted interest rates on annuities include some money that is part of the original principal that was invested.

Current annuity rates will tell you what percentage of your annuity principal you will receive as payment each year.

The thing to remember about annuities, according to certified financial planner Matt Chancy, is that they come in a lot of different varieties because of various annuity formulas. He said he tells clients that annuities are like dogs. Some people like big dogs; others like little dogs. There are loud dogs and quiet dogs. People like different things, Chancy said. “You’ve got to find the one that works for you.”

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While market interest rates at the time you purchase your annuity play a significant role in the annuity’s rate, they are less relevant than with other investments. That’s because the payments you receive will not be interest alone. They will include a portion of your original principal.

For this reason, the interest rate on an annuity is not a rate of return, but a payout rate.

Companies that sell annuities use three factors to price them and set rates, according to Wenliang Hou, senior research advisor at the Center for Retirement Research at Boston College.

Because women tend to live longer than men, they receive lower payout rates. Older people purchasing annuities receive higher payout rates, as a rule.

Hou said a 65-year-old man has a life expectancy of 83 years. A 65-year-old woman is expected to live until age 85.4. So if that 65-year-old man might get a quote of 8.3 percent (not counting administrative costs and profit margins), that woman would be quoted 6.7 percent.

Women, because of their generally longer lifespans, and couples will get lower rates than single men. If you don’t add any beneficiaries, you will have a higher payout rate than if you do.

In other words, provisions that alter the basic contract generally result in you getting less money back.

That’s because these provisions either remove some of your risk by making payout more predictable or increase the number of payments you are likely to receive. Likewise, if you elect to leave annuity funds to someone after your death, your payout rate will be lower.

As a general rule, according to Chancy, the certified financial planner, it takes about 17 years for an annuity purchaser to get all of his or her principal back in payments. If you think you’ll live longer than that, an annuity can be a good purchase.

Different types of annuities have different payout rates. As with other factors, the general rule is less risk and more payments equal lower payout rates. The more time your money has to build, the higher the payout rate.

Fixed annuity rates could be lower than the payout rates on variable annuities. But, because variable annuities are tied to other investments, they also carry the risk of lower rates.

Some types of annuities are straight-forward, said certified financial planner Marguerita M. Cheng, citing fixed annuities, which have preset interest rates.

But indexed annuities, which are tied to investments and share some characteristics with fixed annuities, can be confusing. “This can be kind of overwhelming,” Cheng told Annuity.org. The important thing, she added, is to invest with a reputable insurance company “because this is your retirement.”

Just as annuity types affect your rates, annuity rates affect your financial planning. For example, annuity laddering, a strategy for getting the best return from your annuities, takes into account the same factors that influence your rates.

MYGAS are fixed-rate, deferred annuities that function very much like CDs with significantly higher interest rates.

This type of annuity is very similar to certificates of deposit. There are two main differences between MYGAs and CDs. First, MYGAs offer tax-deferred interest. But MYGAS are not insured by the Federal Deposit Insurance Corporation (FDIC). Rather they’re guaranteed by life insurance companies.

And if you die before the end of the contract – depending on the provisions of your annuity – your estate could lose all of part of the remaining principal. If you outlive what the insurance company thinks your life expectancy is, then you will continue receiving payments even after you have received all of your principal back.

That’s because life-only annuity payments end at death. So the older you are, the fewer payments you are able to receive.

If your annuity allows for beneficiaries or is shared with a spouse, that increases the likely number of payments. Consequently, the payout rate will be lower.

Because some people will die each year without receiving the full value of their annuity investment, annuity companies provide their clients with something called mortality credits. This allows people who live longer to potentially receive more money than they invested, plus interest. In other words, those who live longer can benefit from the unused funds of those who don’t.

This is why some refer to annuities as reverse life insurance. Life insurance is designed to provide for your loved ones if you die early. On the other hand, annuities serve as insurance for you against outliving your savings. So annuities are insurance that pays off if you live long.

All this explains why it’s nearly impossible to compare the interest rates on annuities with other investments, such as certificates of deposit, which operate under completely different rules.

In most cases, since you don’t know how long you’ll live, you can’t know how many payments you’ll receive. So, while you can know the annual payout rate, you can’t know the total amount of money you will receive on your investment.

But you can compare the rates between one annuity and another, so long as both annuities being compared have the same provisions and limitations.

Learn More About Death Benefits And Payout Options

Annuity rates and how they are set are up to the insurance company that provides the annuity. The details will be spelled out in the annuity contract.

The company will usually provide a guaranteed annuity rate for a specified length of time. A minimum guaranteed rate is the lowest rate your annuity will pay out.

Most annuity providers have online annuity calculators, so you can determine the rate the provider is offering for different annuities. A calculator at financial-calculators.com helps you determine your annuity payment schedule for different interest rates and withdrawal frequencies. The same website has another calculator where you can determine the present value of an annuity.

The best way to compare annuities to other investments is to determine the internal rate of return (IRR). This is the interest rate at which the net present value of all cash flows – incoming and outgoing – equals zero. This can be determined using various financial calculators online or Microsoft Excel.

According to Forbes, this annuity table includes some of the best fixed annuity rates available in 2018: