Interest Rate Floors

An interest rate floor is the minimum interest rate that an annuity can earn. Insurance companies set interest rate floors to protect annuity owners from downturns in current rates. These floors guarantee that a predetermined interest rate will be credited to the underlying investment funds of a fixed or indexed annuity.

Brandon Renfro, Ph.D., CFP®, RICP®, EA, expert contributor
  • Written By
    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Co-Owner of Belonging Wealth Management

    As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

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  • Edited By
    Savannah Pittle
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    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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  • Financially Reviewed By
    Thomas J. Brock, CFA®, CPA
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    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Updated: October 30, 2023
  • 3 min read time
  • This page features 4 Cited Research Articles

Key Takeaways

  • The interest rate floor is the lowest interest that can be applied to an annuity regardless of market influence and investment performance. 
  • Fixed annuities and most indexed annuities have an interest rate floor, variable annuities do not.
  • The average interest rate floor for an indexed annuity ranges from 1% to 3%.

What Is an Interest Rate Floor?

An interest rate floor is simply a minimum interest rate that is credited to an annuity’s underlying investment portfolio. Regardless of the market and the performance of the insurance company’s own investments, it must honor the minimum interest rate stated in the contract.

Variable annuities do not have the protection of interest rate floors, but they also don’t have limits on gains.

An interest rate floor is a fundamental feature of fixed annuities and most indexed annuities. Also referred to as a guaranteed rate of interest, it is a risk-mitigating feature that appeals to highly risk-averse investors that do not wish to subject themselves to the possibility of loss of principal. 

Interest Rate Floors and Annuity Types

To understand how interest rate floors work, you first need to know a bit about the various types of annuities and how interest is credited to each.

Interest Crediting by Annuity Type

Fixed Annuities 
The insurance company sets a declared rate that is credited for a guaranteed term, after which a renewal rate is set. The guaranteed term is typically one year for traditional fixed annuities. Multi-year guaranteed annuities pay a fixed rate for a longer period, such as three to 10 years.
Interest is credited based on the performance of a stock market index. Most indexed annuities also offer the option of allocating a portion of the premium to a bucket of fixed investments. In such cases, the annuity uses an indexed strategy and a fixed strategy. The funds allocated to the fixed bucket earn interest in the same way traditional fixed annuities earn interest.
Unless it allows you to allocate a portion of your premium to a fixed account, a variable annuity will have no minimum guaranteed interest rate. It will, however, have unlimited upside potential because interest is credited based on the performance of the selected investments.

According to the U.S. Securities and Exchange Commission, “the money in the [variable] account will vary according to the amount of premiums you pay, the amount of contract fees and expenses and the performance of the investment options you choose.”

In addition to these basic interest crediting methods, specific pricing levers make it possible for insurance companies to provide their clients with annuity income benefits. One of these levers is the interest rate floor.

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What Are Typical Interest Rate Floors?

According to Wink Intel, fixed and multi-year guaranteed annuities (MYGAs) generally offer a minimum guaranteed floor of 1% or more, while indexed annuities usually offer a guaranteed floor of no less than 0.00%.

This floor protects the annuity owner from the negative effects of declining interest rates. Therefore, fixed annuities are considered a safer option than variable annuities. Indexed annuities, which are also subject to caps, spreads and participation rates, are considered moderate-risk products. The average interest rate floor for an indexed annuity ranges from 1% to 3% on at least 87.5% of the premium paid.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: October 30, 2023
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