Definition
A declared rate is the interest rate that an insurer specifies will be credited to a fixed annuity contract or to the fixed account within an indexed or variable annuity for a defined period.
Why it matters
The declared rate is the central pricing variable in fixed annuities and in fixed-account components of multi-account products. It is the rate that determines the contract's accumulation in any period during which it is in effect. Naming the declared rate distinctly is what allows the rate-renewal practice of a carrier to be evaluated separately from the initial rate quoted at issue, which are typically different and frequently materially so.
How it works
A declared rate is set by the carrier and applies to the contract's accumulation value over a specified period — typically one year on traditional fixed annuities and on fixed-account components, or for a contractually fixed multi-year period on multi-year guaranteed annuities. The carrier funds the declared rate through the yield earned on the assets in its general account that support the contract; the difference between the general-account yield and the declared rate is the embedded spread that funds the carrier's costs and margin. At the end of each declared-rate period, the carrier resets the rate within contractually defined limits, including any minimum guaranteed rate the contract specifies. The declared rate can rise or fall in response to the carrier's investment yield, the broader rate environment, the carrier's pricing decisions, and competitive conditions.
In practice
For an individual considering a fixed annuity or a fixed-account component within a multi-account contract, the declared rate at issue is the single most visible feature, but the more consequential question is how the carrier will set the declared rate at each subsequent renewal. A high initial declared rate that resets sharply downward at first renewal produces a different long-run experience than a more modest initial rate held more stably. The contractual minimum guaranteed rate sets a floor below which the declared rate cannot fall. A professional should provide the carrier's historical declared-rate behavior on comparable contracts, the contractual minimum, and any first-year-bonus or teaser-rate features that distinguish the initial rate from the carrier's renewal practice. For multi-year guaranteed annuities, the rate is contractually locked for the guarantee period and the question shifts to the renewal-rate environment at the end of that period.
In the Longevity Standard Framework
Declared rate is supporting vocabulary in the Longevity Standard framework — the rate-setting mechanism through which the embedded spread cost structure operates on traditional fixed annuities and fixed-account components. Embedded spread is one of five values that the cost-structure claim property can take, alongside none, explicit fee, crediting parameter drag, and guarantee charge. The cost-structure property determines how much of the structural pooling benefit reaches the participant; in fixed annuities, the gap between the carrier's general-account yield and the declared rate it credits to the contract is the embedded spread itself, and the carrier's renewal-rate practice across the life of the contract is what determines the realized cost structure beyond the rate at issue.
Related terms
- Fixed account
- Fixed annuity
- Multi-year guaranteed annuity
- Cost structure
- Embedded spread
- General account
- Renewal rate
- Minimum guaranteed rate