Insurance companies set declared rates for traditional fixed annuities and MYGAs. The declared rates for traditional fixed annuities are set annually, whereas rates for multi-year guaranteed annuities are, as the name suggests, guaranteed for longer than one year. Consequently, MYGA rates are set when the guarantee period expires, which is anywhere from two to ten years.
In the process of researching annuities to determine which product is right for you, you’ll come across a few different rates, each specific to the annuity type and provider. For example, you may see a product offered by one insurance company with a declared rate for the fixed asset allocation of an indexed annuity and another type of annuity that offers a bonus rate on top of the declared rate for the first year.
So what does it all mean, and how do you know what interest rate will be credited to your annuity?
What Is the Declared Rate on an Annuity?
Declared interest rates go hand-in-hand with guarantee periods for fixed annuities. For our purposes, multi-year guaranteed annuities — or MYGAs — are not differentiated from traditional fixed annuities, which have a one-year term.
According to Wink Intel, “A declared rate is set for the fixed strategy, and the annuity purchaser receives that rate if the annuity is held for the strategy term (usually one year).”
Declared rates for fixed annuities don’t change, regardless of fluctuations in the market. This protects the annuity owner from market risk, but limits the annuity’s growth potential.
This strategy is different from that of a variable annuity, in which the gains are not limited by a declared rate. With variable annuities, the client invests in the market directly and has the opportunity to earn higher returns. However, this means the client is exposed to market risk and the annuity could lose value if the annuity’s subaccounts perform poorly.
Likewise, indexed annuities do not offer declared rates for a guaranteed period. Rather, the insurance company purchases options based on the performance of an index, and the interest rate is not guaranteed. As opposed to variable annuities, however, indexed annuities are limited in growth and the market risk exposure.
What Is Declared Rate Allocation?
Variable and fixed-indexed annuities typically offer a fixed bucket strategy that allows the annuity owner to allocate a percentage of the annuity funds to a fixed option that credits interest in a manner similar to that of a traditional fixed annuity.
For example, you could purchase an indexed annuity with a three-year term and allocate 65 percent to the indexed strategy and 35 percent to options with a declared rate of 1.2 percent.
Under this strategy, 35 percent of the assets held in the indexed annuity would be multiplied by the declared rate (the declared rate allocation), and 65 percent would be multiplied by the performance of the index (the index allocation).
Asset allocation is a complicated strategy, and you’ll most likely want to discuss your options with your financial advisor.
Other Rates and Pricing Levers to Consider When Buying an Annuity
Declared rates on fixed annuities make it easy to calculate the value of your contract and allow you to plan around a set growth amount and income stream during retirement. Most declared rates reflect effective annual interest rates and are subject to a minimum interest rate.
- Interest crediting term
- Renewal rates
- Participation rates
Intelligence firm Wink Intel suggests researching the minimum guarantees for traditional fixed annuities and MYGAs as well as participation rates, caps and spreads for indexed annuities if you are unable to find current information on an insurer’s renewal rates.
Keep in mind, the declared rate may be void if you withdraw funds prior to the expiration of the term.
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- FINRA. (2016, May 10). Your Guide to Annuities: Fixed Annuities. Retrieved from https://www.finra.org/investors/insights/your-guide-annuities-fixed-annuities
- SEC. (2002, May 1). American Skandia Life Insurance Corporation Prospectus. Retrieved from https://www.sec.gov/Archives/edgar/data/881453/000088145302000181/gma424b3_may-02.htm
- Wink Intel. (n.d.). Annuities 101. Retrieved from https://www.winkintel.com/insurance-basics/annuities/