The annuity industry has been watching the movement of interest rates closely and expecting them to rise for years. Annuity pricing improves as interest rates increase, but it can be difficult for insurance companies to time their annuity strategies. It’s also difficult to time your annuity purchases based upon interest rates. A lot of people are claiming that rates have to increase soon. But in the Marketwatch article, “The interest-rate struggle with annuities,” Stan Haithcock points out that rates really don’t have to go up. They don’t often move much during presidential election cycles and the United States’ 10-year rates are higher than Japan, Germany, the U.K, Spain and many other civilized countries. We can only watch and see to know what will happen with interest rates and when they will eventually rise. Mr. Haithcock explains what happens to different types of annuity products when interest rates do increase.1
If you have a single premium immediate annuity (SPIA), your return is a combination of principal and interest. Higher interest rates will increase the amount of your lifetime payouts. But they may also change life expectancy tables in a way that works against you. The same benefit and drawback hold true when it comes to longevity annuities because their returns are an annuitization of your principal and interest. These longevity annuity products include deferred income annuities (DIA) and Qualified Longevity Annuity Contracts (QLAC).
Fixed rate annuities, also known as Multi-Year Guarantee Annuities (MYGAs), work in a similar manner to CDs. When interest rates increase, fixed rate annuity yields increase just like CD yields. Fixed annuities typically offer a higher yield than comparable CDs. Fixed indexed annuities function differently than traditional fixed rate annuities because they are linked to a stock market index. Increasing interest rates typically mean higher returns from your indexed crediting strategy, but you don’t take advantage of 100% of the market gains. Fixed indexed annuities also offer protection from market downsides. Whether or not you reap the benefits of an increasing market depends on what happens in the markets during the term of your indexed annuity product.
Income riders are contractual guarantees that are used only for income. They are attached to an annuity when it is purchased and cannot be taken as a lump sum or used for their interest. During a time of low interest rates, income rider percentages are often high. But Mr. Haithcock points out that these rider percentages are not actually yield and reminds consumers that they can only be used for income. Variable annuity income riders are significantly affected when interest rates change. Income-rider pricing is better when interest rates increase. This holds true for fixed annuities as well.
Low interest rates have made it difficult for people that seek guaranteed rates, principal protection and guaranteed lifetime income*. These things are out there, but higher interest rates would make for better offers. However, Mr. Haithcock points out that trying to time your annuity purchase for when interest rates hypothetically rise isn’t a wise decision either. You have to consider the payments you lose out on while waiting and the potential that rates don’t even rise in the time you hoped. Increasing interest rates affect different types of annuity products in different ways. It’s important to know how they might change your current or potential annuity yields and payouts.
Written by Rachel Summit
*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.
1. Haithcock, Stan. “The Interest-Rate Struggle with Annuities.” Marketwatch, July 28, 2015. http://www.marketwatch.com/story/the-interest-rate-struggle-with-annuities-2015-07-28?page=1
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