Annuity Interest Rates

Want to know why we think the Annuity Interest Rate is the most important component of an Annuity, after the Surrender Schedule? There are many annuity rates in contracts.  As Annuity contracts are long term, you need to understand what each rate means, and how you can use the various rates published by an Insurance Company to make an informed Annuity decision. It can be confusing, even for professionals. The critical rates are:

Minimum guaranteed rate;

The lowest rate of return you could possibly earn.

Current rate;

The actual current rate of return for investments in the Insurance Company Portfolio .

Renewal rate history;

The actual rate of return over several prior years.

Yield to surrender;

The investment yield over the life of the product.

Remember the Ground Rules – Financial Institutions want your money as a tool to invest and make more money with, and they want to pay as little as possible for the privilege of controlling your money. Think of your annuity purchase premium as a loan to the insurance company- You want to be paid for your loan to the insurance company, don’t you? The various interest rates quoted in a contract tell you a lot about the company and how serious they are about earning your business and your trust.

The Smart Buyer understands the rates, and quizzes the agent or advisor.  You might be surprised at what they DON’T know!

Minimum Guaranteed Rate – Like it sounds, this is the minimum guaranteed rate a company will pay you per contract, regardless of the performance of the company’s investments.  This is their risk and minimum cost of capital.This is a good indicator of financial strength of the company and/or quality of the financial product. Don’t ever buy an annuity product, fixed or variable, with a guaranteed rate of less than 3%.  That will be about as high as the guarantee goes and there are plenty of very strong companies that will promise a minimum return of 3% so don’t bother with a company that pays less. For us, low guarantees represent a lack of confidence in long-range investment planning for the issuing company.  We also believe it is a sneaky way for some companies to recapture the expense of offering a big bonus rate or paying the agent a large commission.
Current Rate This is the current rate of return for the Company’s investments. These rates are an excellent indicator of the current strength and competitiveness of a company as well as a good basis to evaluate a company’s historical performance. The current rate can be easily compared to other annuity contracts.  Pick the best one.  Be critical of annuities that offer a locked rate for the first few years because they often reset to the lower base guarantee. Again, like the teaser bonus rate, do not be fooled by big payments up front when your real concern should be long-term performance.
Renewal Rate – Much more important than the current rate, a history of the company’s rates at renewal will tell you more about how the company in question treats their investors and about their profitability over a number of years. An excellent company will actually volunteer this information while some companies will have a hard time finding it.  Be wary.
Yield to Surrender This is your projected annualized return when the annuity contract expires.  When the surrender schedule has lapsed, how much money do you actually have?  This can also be expressed as an Internal Rate of Return.As you analyze all the interest rate components, this rate is where you should direct your attention.  Large upfront bonuses that give way to lower guaranteed rates, lower current, and lower renewal rates will most likely fall short when you compare the product’s yield to surrender.

Everyone remembers the story of the tortoise and the hare.  The hare jumps out to a quick lead but is surprised in the end by the perseverance of the tortoise. Annuities work along those same lines.  Teaser bonuses do not stack up against solid companies offering good current rates and a solid history of strong renewal rates.  This will give you the information you need to validate the feasibility of the yield to surrender.

Action Items:

Pick at least a 3% minimum Guaranteed Yield;
To Compare the same product among different companies, use Current Yield as your measuring stick;
Compare the past performance of companies with their Renewal Rate;
Most importantly, think like the Tortoise and focus on the Yield to Surrender- you’ll see that slow and steady wins the race!