What Are Annuity Rates?
- Answer your questions about annuity rates, including information on how annuity rates work and how they're affected by factors such as surrender periods.
Annuities are financial products that contract a provider to make regular cash payments over a set timeframe. They are a long-term investment that can help provide financial security, and many older adults use them to finance their retirement. Annuities can increase in value over time, so it's important to understand what annuity rates are and how they work.
What Are Annuity Rates and How Do They Work?
Annuities usually grow in value by a certain percentage each year, which is known as an annuity rate. It's relatively easy to predict the projected value of your annuities if you have a deferred fixed annuity or a multi-year guaranteed annuity (MYGA) because providers guarantee a growth rate for a fixed period, usually between 3 and 10 years. Providers change their annuity rates each day, so it's essential to check the rate on the day you intend to purchase the annuity.
Annuity rates are closely related to bond yields because many annuity providers invest in bonds. Therefore, as bond yields increase, annuity rates tend to do the same. Although investing in bonds is an alternative to purchasing annuities, a fixed annuity doesn't expose you to the same risk because it isn't affected by market fluctuations.
It's harder to predict the performance of an income, variable, or fixed index annuity because these products don't come with a guaranteed fixed interest rate. Instead, the rate fluctuates according to market conditions, so you won't see advertised rates for these annuity types.
How Do Surrender Periods Affect Annuity Rates?
Most annuity providers charge fees to withdraw some of the annuity's cash value, called a withdrawal charge, or to withdraw the entire amount and close the policy, known as a surrender charge. These charges apply if you wish to withdraw or surrender during a set surrender period, often the same length as the accumulation period.
Some annuities come with a market value adjustment (MVA) feature that adjusts the withdrawal or surrender charges depending on current interest rates. In other words, you may end up paying a higher or lower charge than those stated when you purchased the policy if the interest rates have changed since you bought it.
Withdrawal and surrender terms vary widely between providers. For example, some providers allow a certain number of free withdrawals over the policy's lifetime. Others may reduce or waive charges in some circumstances, for example, if you've had the annuity for a certain timeframe.
Annuities with highly restrictive withdrawal or surrender terms often offer higher annuity rates. This is because the tight restrictions discourage short-term investment in annuities, reducing risk to the insurer. It's important to weigh up whether flexibility or annuity rates are more important to you when considering the implications of withdrawal and surrender charges.
How Do I Find the Best Annuity Rates?
Your annuity payout rate doesn't depend solely on the annuity rate. Therefore, you can't gauge which product will provide the best returns based on annuity rates alone. How much money you invest in the annuity and your product type will affect the payout rate. The provider will also consider other factors, including how old you are and how long you're likely to live.
When you're comparing different annuities, ask your broker or a representative from your prospective insurer to explain how they calculate the rates for each annuity you're considering. This information will allow you to compare the potential returns more accurately than solely relying on advertised annuity rates.
Can You Lose Money In An Annuity?
You could potentially lose money if you invest in a variable rate annuity because the annuity rate changes based on the value of underlying investments. You risk lower returns than the amount you invested, much like you would if you directly invested your money in bonds. Fixed annuities don't carry this risk because the insurer guarantees the annuity rate, provided you don't sell or surrender the policy.
You can mitigate this risk when you invest in a variable annuity by purchasing a Guaranteed Minimum Income Benefit (GMIB) as a bolt-on feature. You'll usually need to pay extra for this feature, but it guarantees you a minimum monthly income regardless of market conditions.
Another inherent risk of annuities is the safety of your investment depends entirely on the strength of the financial institution you purchase it from. If your insurer goes bust, you may lose money. Although you may be entitled to reclaim some of your money from your State Guaranty Association, it will be subject to statutory limits that could be lower than the amount you invested.
To reduce the risk of purchasing an annuity from an unstable institution, it's wise to check the insurer's AM Best rating before buying an annuity. AM Best is a credit rating agency focusing on insurers, and reliable insurers should have a rating of A (Excellent) or higher.
What Are Good Annuity Rates?
It's difficult to say what annuity rates you should expect because they change daily depending on market conditions. According to annuity.org, the best annuity rate as of September 2021 for a 2-year fixed annuity was 2.15%, rising to 2.65% for a 5-year annuity and 2.60% for a 10-year annuity.
However, insurers offering the highest annuity rates aren't always the safest investment options. The AM Best ratings of the insurer's on annuity.org's list range from B+ (Good) to A+ (Superior). As mentioned above, it's generally best to look for a company with an A rating or higher to reduce the risk of your insurer becoming insolvent. It's important to balance annuity rates against the financial stability of the provider.