How Rising (or Falling) Interest Rates Affect Annuity Returns

In 2022, the Federal Reserve launched one of the most aggressive rate-hiking cycles in modern U.S. financial history. For millions of near-retirees watching the news, the shift felt seismic. And the numbers bore it out: fixed annuity sales reached a record $164.9 billion in 2023, according to LIMRA industry data, as savers rushed to lock in higher guaranteed returns.

Yet many consumers remain paralyzed by a familiar dilemma: should they buy now, or wait for rates to rise (or fall) further? The anxiety is understandable, but it often rests on a misconception. Interest rates are not the only force shaping annuity returns. Life expectancy, insurer portfolio strategy, and regulatory requirements all play equally decisive roles.

In this guide, I’ll explain how interest rates affect annuities, which types respond most to rate changes, and why trying to time the market can end up costing you more than you think.

Not All Annuities Are Created Equal

Before we talk about rates, it’s important to know that not all annuities respond the same way to economic changes. Choosing the right type matters just as much as picking the right time.

Fixed Annuities and MYGAs: The Direct Connection

Fixed annuities and Multi-Year Guaranteed Annuities (MYGAs) are closely tied to current interest rates. You can think of a MYGA as similar to a CD from an insurance company. You put in a lump sum for a set number of years, usually 3 to 10, and the insurer delivers a fixed rate throughout. When interest rates are high, MYGAs are especially attractive because you can lock in those higher returns before rates drop.

For example, imagine someone moving $200,000 from a low-interest savings account into a five-year MYGA when rates are high. They get a guaranteed rate for the whole term, which helps protect their money from inflation and avoids the ups and downs of the market.

Variable Annuities: Market-Driven, Not Rate-Driven

Variable annuities work differently. Their returns depend on how the stock and bond markets do, not on interest rates. They come with more risk, but they can also offer bigger gains when markets are strong. If you care most about interest rates, these probably are not your first choice.

Fixed-Indexed and Registered Index-Linked Annuities: The Middle Ground

Fixed-Indexed Annuities (FIAs) are a middle ground. They pay interest based on how a market index, like the S&P 500, performs. Your original money is protected by a minimum rate, usually between 0% and 1%. You will not lose money if the index drops, but your gains are limited by caps or participation rates.

Registered Index-Linked Annuities (RILAs) work a bit differently. Instead of a set minimum, they give you a defense against losses, like covering the first 10% if the market drops. In return, you might get higher potential gains than with a traditional FIA. If you want some growth but do not want all the risk, RILAs can be a good option when rates are unpredictable.

Behind the Curtain: How Your Payout Is Actually Calculated

The 10-Year Treasury, Not the Fed Funds Rate

Here is a detail that surprises many buyers: annuity rates do not directly track the Federal Reserve's overnight lending rate. Insurers invest policyholder premiums predominantly in long-duration bonds, chiefly investment-grade corporate bonds and U.S. Treasuries. As a result, annuity rate changes correlate most closely with the 10-Year Treasury yield and the Moody's Aaa Corporate Bond index, rather than short-term rate movements.

This makes annuity payouts slow to change. If the Fed suddenly cuts rates, new MYGA rates do not drop right away. If rates rise quickly, it can take months for that to be reflected in annuity prices. If you only watch Fed news, you might miss what really matters for annuity rates.

Life Expectancy and Mortality Credits

For lifetime income products such as Single Premium Immediate Annuities (SPIAs), the most powerful pricing lever is not interest rates at all: it is life expectancy. Insurers pool the longevity risk of thousands of annuitants. The funds contributed by those who pass away earlier than average subsidize the ongoing payments of those who live longer. This mechanism, known as "mortality pooling" or mortality credits, is something no bond or CD can replicate.

For example, a 72-year-old who buys an SPIA today will get a much higher monthly payment than a 62-year-old buying the same contract for the same amount. That is because the older person is expected to collect payments for fewer years, so the insurer can pay more each month.

Insurer Liability Rebalancing

There is another factor that receives little attention. When interest rates drop a lot, insurance companies can end up owing more in future payments than their investments are earning. To handle this, they might limit the number of long-term annuities they offer or lower rates more than you might expect from just looking at Treasury yields.

For example, during a period when rates were very low, some large insurance companies stopped offering certain long-term annuities or reduced their guarantees. They did this not because they were in trouble, but because their risk models told them to. Knowing this helps explain why some products disappear even before rates officially change.

The Regulatory Factor: Actuarial Guideline 43

Post-2008 reforms introduced Actuarial Guideline 43 (AG43), which requires insurers to hold additional reserves for variable annuity guarantees during low-interest-rate stress scenarios. In effect, rate environments directly influence how expensive it is for an insurer to offer certain guarantee riders, thus affecting product pricing and availability in ways entirely invisible to consumers.

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The Danger of Timing the Market (and What to Do Instead)

The Mathematical Cost of Waiting

Waiting for better rates can cost you more than you think. If you put off buying a lifetime income annuity for a year, hoping for a higher payout, you lose a whole year of guaranteed income. In many cases, it can take almost 19 years to make up for that lost income, even if you get a slightly higher monthly payment later.

For a healthy 68-year-old, waiting could mean not breaking even until age 87. That makes timing the market a risky move for most people.

The True Cost of COLA Riders

Many people add a Cost of Living Adjustment (COLA) rider to guard against inflation. This can be a smart move, but it comes with a trade-off. Adding a COLA, usually set at 2% to 3% increases each year, lowers your starting monthly payment. You only get the full benefit if you live long enough for the increases to offset the lower payments at the start.

The Annuity Laddering Strategy

Annuity laddering is a practical way to avoid trying to time the market. Instead of putting all your money into one annuity at once, you split it up and buy several smaller annuities at different times or with different end dates. This approach:

• Averages out exposure to rate fluctuations (dollar-cost averaging applied to annuities)
• Preserves liquidity as each contract matures
• Allows a buyer to capture higher rates if they emerge, without sacrificing all near-term income if they do not

The P.I.L.L. Framework

The key thing to remember is that annuities are not meant for speculation. The best advisors use a clear process to help you decide. You should buy an annuity to solve a specific financial need, not just to get the highest rate. Here are four main problems annuities can help with:

• Principal protection: shielding assets from market drops
• Income for life: eliminating the risk of outliving savings
• Legacy: transferring wealth efficiently to heirs
• Long-term care: funding potential care costs without liquidating assets

Check the Insurer, Not Just the Rate

An annuity is a long-term promise from an insurance company, not a government-insured bank account. If you only look for the highest rate and do not check the insurer’s financial strength, you are taking a real risk. Always make sure the company has a strong rating from A.M. Best or Moody’s. State guaranty associations offer some backup, but their coverage is different from FDIC insurance and varies by state.

How Annuities.net Supports Insurance Professionals

For insurance agents, knowing how rates work is just one part of helping clients. Most clients do not object to rates themselves—they object because they do not understand them. Annuities.net gives agents tools to explain this clearly:

• Rate comparison tools: real-time MYGA, SPIA, and Income Rider calculators allow agents to benchmark the best available products against a client's specific retirement timeline.
• Educational content: independent, E-E-A-T-compliant articles help agents explain the 10-Year Treasury correlation, the cost of waiting, and the P.I.L.L. framework without appearing sales-driven.
• Macro intelligence: coverage of insurer liability rebalancing trends and regulatory developments, such as AG43, keeps agents ahead of product availability shifts.
• Trust infrastructure: transparent, reviewer-attributed content positions agents as fiduciaries focused on client outcomes rather than transaction volume.

Bottom Line: Rates Matter, but They Are Not the Whole Story

Interest rates have a big role in how annuities are priced, especially for fixed annuities and MYGAs. But there is more to it. Life expectancy, how insurers manage their investments, and the rules they must follow all affect what you actually get.

The best annuity is not always the one with the highest rate. It is the one you buy at the right time for your retirement, from a strong company, and set up to meet your needs. That does not change whether rates are going up or down.

Want to see how today’s rates could affect your retirement income? Try our MYGA rate calculator or SPIA income estimator to compare your options. If you are an insurance professional, you can use our full set of tools to find the best product for every client.

References

1. American Academy of Actuaries. (2026). Fixed indexed annuities: Policy paper on product mechanics, investment strategies, and risk management. Retrieved from https://actuary.org/wp-content/uploads/2026/02/life-FIA-policypaper.pdf
2. Bankrate. (n.d.). Single-premium immediate annuity. Retrieved from https://www.bankrate.com/retirement/single-premium-immediate-annuity/
3. Commission, U. S. (July 1, 2024). SEC Adopts Tailored Registration Form for Offerings of Registered Index-Linked and Registered Market-Value Adjustment Annuities. SEC Press Release 2024-81. https://www.sec.gov/newsroom/press-releases/2024-81
4. Contributors, K. (April 15, 2026). Income and Life Expectancy Not Adding Up? An Annuity Could Solve the Equation. Kiplinger. https://www.kiplinger.com/retirement/annuities/how-annuities-can-help-with-longevity-risk
5. (2023). Variable Annuities. FINRA.org. https://www.finra.org/rules-guidance/guidance/reports/2023-finras-examination-and-risk-monitoring-program/variable-annuities
6. (2026). Where Are Fixed Annuity Premiums Invested: General Account. LegalClarity. https://legalclarity.org/where-are-fixed-annuity-premiums-invested-general-account/
7. Team, L. (2026). Are Annuities FDIC Insured? How They’re Protected. LegalClarity. https://legalclarity.org/are-annuities-fdic-insured-coverage-and-protections/
8. LIMRA. (2024). LIMRA U.S. annuity sales post another record year in 2023. Retrieved from https://www.limra.com/en/newsroom/news-releases/2024/limra-u.s.-annuity-sales-post-another-record-year-in-2023/
9. Nuss, K. (April 20, 2026). Too Scared to Dive Into a Fixed-Rate Annuity? Interest Rates Make It Worth Dipping Your Toe In. Kiplinger. https://www.kiplinger.com/retirement/annuities/fixed-rate-annuity-interest-rates-make-it-worth-dipping-your-toe-in‍
10. (March 16, 2022). How insurers can respond to higher interest rates. PwC. https://www.pwc.com/us/en/industries/financial-services/library/higher-interest-rates.html