What Is the Assumed Interest Rate (AIR)?

The assumed interest rate (AIR) is the rate of interest (or growth rate) selected by an insurance company. The assumed interest rate is provided to determine the value of an annuity contract&nꦰbsp;and, therefore, the periodic income payment provided ✅to the annuitant.

Combined with other factors such as the annuitant's age upon 澳洲幸运5开奖号码历史查询:annuitization, spousal coverage options and the type of annuity coverage chosen, the AIR determines the monthly payment 𝄹the annuitant will receive. Insurance companies use the AIR to calculate the value of an annuity.

Many investors ﷺuse annuities to generate retirement income, and knowing the AIR can help such annuitants plan financially for their retirement years because it lets them know how much they can expect to receive from an annuity. Calculating the value of an annuity also lets investors plan additional investments in other🐻 vehicles.

Understanding the Assumed Interest Rate (AIR)

The assumed interest rate (AIR) is the minimum interest rate that must be earned on investments in the policyholder's cash-value account in order to cover the insurance company's costs and expected 澳洲幸运5开奖号码历史查询:profit margin. A larger AIR will result in a more robust prediction for market returns,𒈔 as well as greater monthly income payment for the annuitant.

The AIR is not a 澳洲幸运5开奖号码历史查询:guaranteed rate of return. Rather, it is an earnings target that the insurance company sets for the annuity account. The account must meet this earnings target in order to maintain payment levels. As annuity value changes, the payment received by the investor changes. If the account outperforms the AIR, an investor can expect his or her payments to increase in size. If performance falls below the AIR, p𝔍ayments will decrease i﷽n size. Performance is always measured against the AIR, not past performance.

What It's Based On

An annuity payment is based on the number of annuity units owned by the investor, multiplied by the annuity unit value. When performance equals AIR, the annuity unit value remains unchanged, and so will the investor's payment. Thus, selecting a realistic AIR is very important.

If the AIR is too high, the value of the annuity unit will continue to fall, along with the investor's payment. If the account outperforms the AIR, the value of the annuity unit will continue to rise, and so will the investor's payment. The AIR is only relevant during the payout phase of the contract when the investor is receiving payments and owns annuity units. The accumulation of units during the accumulation stage—or if benefits are deferred—is immaterial to the assumed interest rate.

Example of an Assumed Interest Rate

As a hypothetical example, assume a 澳洲幸运5开奖号码历史查询:variable annuity, where the annuitant receives a minimum guaranteed periodic payment that is tied to the performance of the annuity's underlying investments. An assumed interest rate of 5% on $1 million of principal would thus generate larger 澳洲幸运5开奖号码历史查询:minimum payments to the annuitant than a✅n annuity performing at 2%.

Although the annuitant can receive additional payments if the annuity's underlying assets outperform expectations, the minimum guaranteed payment is tied to the assumed interest rate.