Annuity rate quotes

Immediate annuities are one of the most popular vehicles for savings and investment today. Apart from the safety and security of an annuity, another advantage is the flexibility of an annuity. There are two main types to choose from (fixed, which yields a direct cash payout per month to the buyer of the annuity, or variable)

Another one of the key advantages of annuities, be they fixed or variable, is the benefit of being able to postpone paying taxes on earnings from annuities until a future point in time. This enables you to earn interest on money that would have otherwise been paid to taxes. Thus, your money compounds much faster than it would have in any other type of fully taxable savings vehicle.

In any discussion involving annuities, the word “rate” will inevitably recur. There are several contexts in which to take the term “annuity rate”. Let’s take a look at those contexts and differentiate them. 

Rate of return

One of the most important differences between annuities and other savings vehicles, such as, say, Certificates of Deposit (CDs), is that annuities offer a fixed rate of return on your investment. This means that the amount of the monthly income you get from investing in an annuity does not depend on the economic situation or the performance of financial markets. This rate would be expressed in a percentage, i.e. 4% rate of return. This rate refers to how much percentage profit you get from your investment over the entire duration of the annuity.

Interest rate

In the context of annuities, you can take the interest rate to mean the same as rate of return. The interest rate is simply the rate at which your money grows. A key advantage of an annuity as savings vehicle is that it comes with higher interest rates than normal savings vehicles such as a time deposit or regular savings account. At time of writing, annuities guaranteed rates run at about 4%.

Current rate

Although annuities offer a fixed rate of return, this rate is not fixed over the entire duration of the annuity contract, which can last many years or even entire lifetimes. When an annuity is issued, the issuing insurance company sets a rate of return/interest rate for the first year of payments only. This is called the current rate. The current rate is usually higher than the interest rates for the remaining years of the annuity.

Some insurance companies call the current rate a “teaser” or “promotional” rate. This is pretty standard among all annuity policies.
 
The important thing to remember is that the current rate is guaranteed. You cannot receive any lower than that for the first year of annuity payments.

Base rate

For the rest of the duration of your annuity, you will receive a lower interest rate/rate of return which is called a base rate. There are two important things to remember about the base rate. First is that it is not guaranteed. There are many insurance companies that pay an actual base rate lower than the one they promised. Second is that it is this rate that you really have to consider, since no matter how high your current (i.e., first-year) rate is, it is the base rate that you have to live with for the rest of your life!

By the way, the base rate is also known as a “renewal rate”.

Bonus rate

This is simply the difference between the current rate and the base rate. Don’t think it’s an additional rate that will be tacked on to the interest rates you will receive.  

NEXT ARTICLE >>