Much of the news you hear about in the financial industry revolves around the current interest rate and how it might affect different investment products. You might hear about how one product is a safer bet during periods of low rates, or that you should definitely avoid a certain product until rates improve. But very few articles actually talk about how interest rates affect a product.
Financial education is crucial in creating a path towards financial freedom. In order to make the best decisions possible for your financial future, it is imperative that you educate yourself on the different tools available to you and how each might help you reach your goals.
Here’s a summary of how interest rates affect specific types of annuity products, according to the financial experts at The Street.
Single Premium Immediate Annuity (SPIA): The primary pricing mechanism of these annuities is your life expectancy at the time you start making payments, with interest rates playing a secondary role. The only exception is with a “Period Certain Only” SPIA, when interest rates would be the primary pricing factor.
Deferred Income Annuity (DIA): Similar to SPIAs, your life expectancy at the time when payments starts is the primary pricing mechanism. DIAs are structured similarly to SPIAs, but with different start date parameters.
Qualified Longevity Annuity Contract (QLAC): Once again, your life expectancy is the key with these products with interest rates playing a secondary role. QLACs have a DIA structure but can only be used in Traditional IRAs and some 401(k) type retirement plans.
Multi-Year Guarantee Annuity (MYGA): The sole factor in MYGA pricing is the interest rate. MYGAs are often referred to the Certificate of Deposit (CD) of the annuity industry. The difference between them is that in a non-IRA account, MYGA interest grows tax-deferred, while CDs require that taxes be paid on the interest each year.
Fixed Index Annuity (FIA): Interest rates play a big role with these products. The cost of the index call options purchased by the carrier and the caps/spreads placed on the potential index call option gains are both influenced by the interest rate. Most policies also consider the interest rate in determining the bonds held and the declared fixed rate within these policies.
Variable Annuity (VA): In general, low interest rates means higher stock market returns. Variable annuity separate accounts, like mutual funds, should perform better, and attached benefit riders might also be affected.
Income Rider: Income Riders are added benefits to a deferred annuity that provide future income guarantees. Interest rates can affect the percent growth that Income Riders offer during the deferral years, however your life expectancy plays the largest role.
According to the article, buying signals don’t exist with annuities, meaning you can’t “time out” when to purchase an annuity product. When you find the highest contractual guarantee that best fits your specific needs, it is recommended to lock it in, transferring any risk to the annuity company. Be sure to shop around though, because annuities are commodity products.
Everyone would love to see higher interest rates, but that just isn’t the current reality. It is important to understand how current rates affect all annuity types so that you can make the most informed decision for yourself. No two annuities are created equal, so do your homework and take control of your own financial future.
Written by Rachel Summit