Written By : Rachel Christian
Edited By : Kim Borwick
Financially Reviewed By : Rubina K. Hossain, CFP®
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The assumed interest rate, or AIR, is the growth rate of a variable annuity. Insurance companies use an assumed interest rate to calculate a variable annuity’s periodic payments and its overall value. Subsequent payments may be higher or lower, depending on the actual rate of return during the payment period.

An assumed interest rate directly impacts the payment amounts of your annuity. If the subaccounts in your variable annuity outperform the AIR, your payments increase. If performance falls below it, payments decrease. The performance of a variable annuity’s underlying investment portfolio is always measured against the assumed interest rate, not past performance.

The assumed interest rate is just one factor insurance companies use to determine an annuity’s initial payment amount. Others include the type of annuity, the annuity owner’s age and any additional coverage options.

What Is the Assumed Interest Rate?

The assumed interest rate is the interest rate that insurance companies assign to variable annuities. These financial products allocate your initial lump-sum premium to subaccounts in an investment portfolio. Contributions can be placed in stocks, bonds or other investments.

Your annuity contract may allow you to choose between receiving fixed payment amounts or payment amounts that vary based on the performance of the subaccounts the annuity’s underlying portfolio, according to the U.S. Securities and Exchange Commission.

Variable annuities offer the potential for higher gains as compared with fixed annuities — but they also carry risk.

Because returns from variable annuities can fluctuate, insurance companies use the assumed interest rate to calculate your initial payment. It’s a sort of benchmark of what to expect from subsequent payments.

It’s important to keep in mind that the AIR is not a guaranteed rate of return on the investments in your underlying subaccounts. Think of it more as an earning goal the insurance company sets for these investments.

Did You Know?
You don’t pay taxes on earnings until you take money out of an annuity.

One of the most attractive features annuities offer is a reliable, steady stream of retirement income. You are guaranteed to receive a certain amount of money for a specific time, or if you choose, for the rest of your life.

The AIR is directly tied to the guaranteed payment. You may receive more money during months when the annuity’s underlying assets perform well. If investment performance falls below the AIR, payments decrease during the payout phase.

One way to offset this is with an additional annuity add-on, known as a rider. These enhancements are added to your policy at an extra cost and guarantee the minimum payment amount outlined in your contract — even if market conditions fail to meet the AIR.

Examples of riders include the guaranteed minimum income benefit, or GMIB, and the guaranteed minimum withdrawal benefit, or GMWB.

The AIR usually ranges from 3 to 7 percent.

Example of Assumed Interest Rate

Let’s assume your variable annuity is beginning to pay out. When you bought your annuity, you paid a $100,000 premium to fund the policy and agreed to a 4 percent assumed interest rate.

If the AIR is 4 percent and the growth of the investments within your variable annuity’s portfolio net a 4 percent return, you’ll receive the monthly payout you expected.

In general, the larger the assumed interest rate, the larger your periodic payments.

But remember, the AIR is just one of several factors used to determine your minimum monthly payment. Your age, the type of annuity and any death benefits also play a role in calculating your minimum payments.

Because the AIR heavily influences the size of your retirement income, it pays to shop around for an insurance company willing to offer you a higher AIR.

Otherwise, if the AIR is too low, your annuity payments may not be very large, especially after the insurance company’s fees and expenses are deducted.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: October 20, 2020

2 Cited Research Articles

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  1. National Association of Insurance Commissioners. (2019, October 14). Variable Annuities. Retrieved from https://content.naic.org/cipr_topics/topic_variable_annuities.htm
  2. U.S. Securities and Exchange Commission. (n.d.). Variable Annuities: What You Should Know. Retrieved from https://www.sec.gov/investor/pubs/sec-guide-to-variable-annuities.pdf