Do Annuity Rates Fluctuate With Interest Rates?

Annuity rates can fluctuate with interest rates, but not always in the way people expect.

One of the biggest mistakes is assuming that annuity rates automatically rise whenever the Federal Reserve raises rates or fall whenever the Fed lowers them.

There are different types of annuity rates, and each is priced differently.

For lifetime income products, life expectancy is the primary pricing factor. Interest rates play a secondary role.

For MYGAs, interest rates matter more, but life insurance companies still have other pricing factors that can cause their rates to move differently from bank CDs.

Key Takeaways

• There are payout rates and interest rates in the annuity world.
• Lifetime income payout rates are primarily based on life expectancy.
• Interest rates play a secondary role in pricing lifetime income.
• MYGA rates are influenced by interest rates, but they do not always move in lockstep with the Fed.
• Life insurance companies have multiple pricing and profitability factors.
• Current contractual guarantees should be compared across carriers instead of trying to perfectly time interest rates.

What Is an Annuity Payout Rate?

A payout rate is not the same thing as an interest rate.

Lifetime income products such as:

• Single Premium Immediate Annuities
• Deferred Income Annuities
• QLACs
• Income Riders

provide payout rates.

Those payout rates primarily reflect life expectancy.

If someone says an Immediate Annuity has a payout rate of a certain percentage, that does not mean the annuity is earning that percentage as interest.

It is describing the amount being paid relative to the premium.

Life Expectancy Drives Lifetime Income Pricing

For lifetime income, the biggest pricing factor is how long the insurance company expects to make payments.

If the income is based on one life, the insurer looks at that person's life expectancy.

If the income is joint, the insurer looks at both lives.

That is the primary pricing mechanism.

Interest rates matter, but they do not drive the pricing train.

Why Interest Rates Play a Secondary Role

Life insurance companies are not pricing lifetime income the same way a bank prices a CD.

They are pricing longevity risk.

The company is agreeing to keep paying for as long as the covered person is alive.

That means age and life expectancy are central to the calculation.

Interest rates are part of the equation, but only one part.

Do Lifetime Income Rates Follow the Fed?

Not necessarily.

There can be times when the Fed raises rates and lifetime income guarantees decline.

There can also be times when the Fed lowers rates and certain guarantees improve.

That can happen because the insurance company may want more or less business from a particular age range.

That is why trying to time lifetime income around a Fed meeting can be misleading.

How MYGA Rates Work

MYGAs, or Multi-Year Guarantee Annuities, provide a guaranteed interest rate for a specific period.

Terms can range from one year through ten years.

Because MYGAs offer a fixed contractual rate, they are more directly affected by interest rates than lifetime income annuities.

But even MYGA rates do not always move exactly with the Fed.

Why MYGA Rates Can Move Differently From CDs

MYGAs are issued by life insurance companies.

Those companies have multiple sources of revenue and multiple pricing levers.

They may be managing:

• life insurance business
• lifetime income business
• bond portfolios
• mortality risk pools
• prevailing interest rates

Because of that, MYGA pricing can sometimes move differently from bank CD pricing.

A Fed Increase Does Not Guarantee a Better MYGA Rate

It is possible for the Fed to raise rates while a particular MYGA carrier lowers its guarantee.

The reverse can also happen.

That is why current quotes matter more than assumptions.

The rate available from the carrier today is the contractual number you can actually evaluate.

Do Not Confuse Fixed Rates With Indexed Returns

Fixed Index Annuities are different.

Their potential interest can depend on:

• caps
• spreads
• participation rates
• index performance

Those future returns are not guaranteed in the same way as a MYGA rate.

If you want a contractually guaranteed interest rate, MYGAs are the more straightforward comparison.

Annuities Are Not Market-Growth Products

Annuities should not be purchased for market growth.

They are contracts designed around guarantees.

If you want market growth, use products built for market participation.

If you want principal protection or lifetime income, then annuities may fit.

Start With the Objective

Before worrying about where rates may go next, answer two questions:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

If you need lifetime income, compare lifetime income guarantees.

If you need a fixed rate, compare MYGAs.

Compare Current Guarantees

Because annuity pricing can change independently of broader interest-rate moves, the best approach is to compare current contractual guarantees across multiple carriers.

Do not assume the carrier you checked last month will still be the most competitive today.

Where to Compare Annuity Rates

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

For lifetime income, compare payout guarantees. For fixed-rate accumulation, compare current MYGA rates by state and term.

The Bottom Line

Annuity rates do fluctuate with interest rates, but interest rates are not the only factor.

Lifetime income payouts are primarily based on life expectancy.

MYGA rates are more directly influenced by interest rates, but life insurance company pricing can still cause them to move differently from the Fed or bank CDs.

Instead of trying to predict the perfect moment, compare the contractual guarantees available when you actually need them.

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