What Is a Guaranteed Annuity Rate?

by Ciaran John ; Updated July 27, 2017

Fixed deferred annuity rates feature a guaranteed rate of return below which the annuity's interest cannot drop during the term of the contract. Annuity products have a variety of other rate guarantees to assure the contract holder of a certain rate of return as long as the contract holder does not withdraw funds from the product prior to a specified date.

Fixed Annuity Rates

Fixed annuities are a type of deferred annuity with terms lasting for between four and 10 years. Generally, fixed annuities offer a guaranteed rate of return for the duration of the term. Fixed annuity contracts work similarly to certificates of deposit because a depositor invests funds for a period of time in exchange for interest and a return of principal at the end of the term. However, unlike certificates of deposit accounts, annuities are not federally insured and are reliant on the continued strength of the insurance company that writes the contract.

Renewal And Bailouts

Fixed annuities that do not have fixed rates for the entire term usually have rates that renew every year. The insurance company does not guarantee that the renewal rate will equal or surpass the initial rate but does include a minimum rate guarantee in the contract. The insurance company can elect to renew the rate at less than the guaranteed minimum, but if it does so, then the contract owner can bail out and withdraw all funds without incurring a penalty.

Guaranteed Minimum Income Benefit Rates

Variable annuity returns fluctuate because these annuity products invest client funds in the stock market. However, variable annuity contracts have guaranteed minimum-income-benefit rates. If the client's annuity loses value in any given year, the annuity company increases the income value of the account by a guaranteed percentage rate. At the end of the annuity term, the client can cash in the annuity or use the income value as the basis for creating a lifetime income stream.

Index Annuity Rate Guarantees

Index annuities are long-term annuity contracts lasting up to 20 years that pay returns based upon the performance of an underlying index such as the Standard and Poor's 500. However, most index annuities have minimum rate guarantees, which means that the client is assured of receiving a modest return even if the index linked to the annuity loses value over the course of the annuity term. Some index annuities base the minimum rate of return on an amount below the actual purchase price of the annuity. The client gets back 80 or 90 percent of his initial investment and a small amount of interest on that sum. The remainder of the principal goes toward administrative fees.