The initial interest rate is the rate the insurance company credits to a fixed deferred annuity for an initial set period after you buy it. That rate is guaranteed not to change during that stated period.
In a fixed deferred annuity, money earns interest at a rate the insurer sets. The rate is fixed for some period, usually a year, and after that rate period ends, the insurance company sets another fixed interest rate for the next period. That later rate could be higher or lower than the earlier rate.
The initial interest rate is important because it may apply only for a limited time. The NAIC guide explains that some contracts may credit a higher initial rate at the beginning than they will later. In some contracts, this higher beginning rate is called a bonus rate.
After the initial period ends, the annuity moves to a renewal interest rate. The contract should explain how the renewal rate will be set. The NAIC guide suggests asking what the initial interest rate is, how long it will stay in effect, when the renewal rate will be announced, and how the insurance company will tell you what the new rate will be.
You should also compare the initial rate with the guaranteed minimum interest rate. The guaranteed minimum interest rate is the lowest rate the annuity can earn, and it is stated in the contract and cannot change as long as you own the annuity.
Because terms and conditions vary by contract, read the contract and disclosure carefully and make sure you understand how long the initial rate lasts and what happens after it ends.
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Educational content provided by Jeffrey Scott McLeod, LUTC, National Insurance Producer License #558629. This is for informational purposes only and is not a recommendation to buy or sell any annuity. Guarantees are subject to the claims-paying ability of the issuing insurance company. Always consult your own advisor and read the full NAIC Buyer’s Guide. For residents of your state.
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