How Interest Rates Affect Specific Annuities

Interest rates matter when evaluating annuities, but they do not affect every annuity the same way.

That is one of the biggest misconceptions people have when deciding whether to buy an annuity.

It is easy to assume that if the Federal Reserve raises rates, annuity guarantees will automatically rise. Or if rates fall, annuity guarantees must fall.

In reality, annuity pricing is more complicated than that.

Key Takeaways

• Interest rates affect different annuity types in different ways.
• Life expectancy is the primary pricing factor for lifetime income annuities.
• Interest rates play a secondary role in lifetime income pricing.
• MYGA rates are influenced by interest rates, but carrier capacity and other factors also matter.
• Annuity guarantees do not always move in the same direction as Federal Reserve rate changes.
• Comparing multiple carriers is more useful than trying to perfectly time interest rates.

Interest Rates Are Not the Only Factor

There are many different types of annuities.

That matters because the pricing of a lifetime income annuity is different from the pricing of a MYGA.

Annuities generally solve four contractual objectives using the PILL framework:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

Interest rates matter most when evaluating products tied to principal protection and lifetime income, but even there, they are only one part of the calculation.

How Interest Rates Affect Lifetime Income Annuities

There are four primary annuity solutions that can provide lifetime income:

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

For these products, interest rates play a secondary role.

The primary pricing mechanism is life expectancy.

Why Life Expectancy Matters More

When an insurance company guarantees lifetime income, it is estimating how long it may have to make payments.

For a single-life annuity, pricing is based primarily on that person's life expectancy.

For joint-life income, the life expectancies of both people matter.

Generally, the longer the insurance company expects to make payments, the lower the initial payout will be.

That is why age is so important in lifetime income pricing.

Single Life vs. Joint Life

A single-life payout generally provides more income than a comparable joint-life payout.

The reason is straightforward.

With single-life income, the insurance company is covering one lifetime.

With joint-life income, payments may need to continue for much longer because the guarantee covers two people.

The younger person can have a significant impact on the payment because the insurance company may be responsible for income over that longer life expectancy.

Why the Fed Does Not Control Lifetime Income Quotes

A Federal Reserve decision does not directly determine your lifetime income quote.

There can be situations where interest rates rise and a carrier lowers its income guarantee.

There can also be situations where rates fall and a carrier increases its guarantee.

That happens because carriers are not only reacting to interest rates.

They are also managing how much longevity risk they want to accept in different age groups.

Carriers Price for Specific Age Ranges

Life insurance companies manage groups of policyholders based partly on age and life expectancy.

If a carrier wants more business from people in your age range, it may increase the contractual income guarantee to attract more buyers.

If it already has enough people in that age group, it may lower the guarantee.

That is one reason annuity quotes can move independently of broader interest rate trends.

Why Annuities Are Commodity Products

Carrier pricing changes.

One company may offer the highest lifetime income guarantee today.

Another may be more competitive later.

That is why annuities should be compared across multiple carriers rather than selected because of the company name or brochure.

For lifetime income, the objective is to compare the contractual guarantees available from appropriately rated companies.

How Interest Rates Affect MYGAs

A Multi-Year Guarantee Annuity, or MYGA, provides a guaranteed interest rate for a specific period.

Because a MYGA is a fixed-rate product, interest rates play a more visible role.

However, MYGA rates still do not move perfectly in step with Federal Reserve decisions.

Insurance companies have many different sources of profitability and liabilities to manage.

That means carrier-specific decisions can cause MYGA rates to move differently from broader interest rates.

MYGA Rates Can Move the Opposite Direction

There can be times when the Fed lowers rates and certain MYGA rates rise.

There can also be times when the Fed raises rates and some carriers lower their guarantees.

That does not mean interest rates are irrelevant.

It means they are only one part of the pricing process.

Carrier capacity, investment portfolios, business needs, and other internal factors can affect the guarantee being offered.

Do Not Try to Perfectly Time an Annuity Purchase

There is no guaranteed sweet spot where you can perfectly time an annuity purchase around the Fed.

If you need a contractual guarantee, focus on the guarantee available when you actually need it.

Trying to predict the exact future direction of rates can result in waiting for a pricing change that never arrives.

What About Fixed Index Annuities?

Fixed Index Annuities are not straightforward interest-rate products in the same way as MYGAs.

Potential indexed interest depends on the crediting method, which can include:

• caps
• participation rates
• spreads
• other contract provisions

Those future results are not the same as a guaranteed MYGA rate.

If your goal is guaranteed accumulation, a MYGA provides a clearer contractual number.

Do Not Buy Annuities for Market Growth

Interest rates should not distract from the basic purpose of annuities.

Annuities are insurance contracts.

They are designed to provide contractual guarantees.

If your primary objective is market growth, use products designed for market growth rather than trying to turn an annuity into something it is not.

Start With the Goal

Before worrying about interest rates, answer two questions:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

If the goal is lifetime income, compare lifetime income.

If the goal is guaranteed accumulation, compare MYGA rates.

The financial objective should determine which annuity and which pricing factors matter.

Where to Compare Annuity Guarantees

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

Because carriers can adjust pricing independently of Federal Reserve decisions, comparing current quotes is generally more useful than trying to predict where interest rates are going next.

The Bottom Line

Interest rates affect annuities, but they are not the only factor.

For lifetime income annuities, life expectancy is the primary pricing mechanism and interest rates play a secondary role.

For MYGAs, interest rates matter more directly, but carrier-specific pricing decisions can still cause guarantees to move differently from broader rates.

Instead of trying to perfectly time the Fed, focus on the contractual guarantee you need and compare the carriers offering it.

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