Annuity Payout Rates Vs. Interest Rates: Confusing Rates of Return

Annuities can be confusing enough without potentially misleading insurance-company advertising, marketing, and sales presentations.

Unfortunately, in some contexts -- whether intentionally or unintentionally -- annuity payout rates are often confused (or conflated) with interest rates.

However, the two are very different!

Payout rates simply express the ratio between the annual payout and the premium outlay. Interest rates, on the other hand, describe the relationship between annual earned interest and principal.

The former rate only applies after annuity annuitization or "settlement," which involves the transfer of premium ownership from the individual to the insurance company. Crucially, an annuity payout includes a return of some principal along with possible interest and so-called "mortality credits." An annuity payout is not generally referred to as a "return," and an annuity payout rate is not expressing a rate of return (ROR).

Therefore, a payout rate cannot be straightforwardly compared with an interest rate, which latter does express what is commonly thought of as a rate of return (ROR).

In this video, I will first of all sketch the difference between the two rates. I'll also try to supply viewers with non-technical explanations and examples.

Secondly, I will say a few words about the context in which the two rates are often confused.

But, perhaps more importantly -- and certainly more practically -- I'll discuss a handful of "takeaways" to keep in mind while you're thinking through your own investment decisions with trusted advisors.

Caveat: Of course, not all annuity salespeople are guilty of misrepresentation. Additionally, many types of people (beyond insurance or other sales persons) can be guilty of misrepresentation.

Disclaimer: I am not presently an annuity sales person, financial planner, or retirement advisor of any kind. This presentation is intended for general informational or entertainment purposes only. Nothing herein should be construed as annuity-related, financial, insurance, investment, legal, retirement, savings, tax, or any other sort of advice. If you need personalized evaluations or recommendations, consult licensed experts in your area.

Credits:

Image of running man: Alexander Redmon, https://www.freeimages.com/photo/runn..., https://images.freeimages.com/images/...

Music: "Bloom," "Halfway," "Mighty," "Pity," and "Switch," all written by
Amit Nagra, and performed / produced by AlterEgo. Songs licensed to Matthew Bell via Soundstripe.com.