South Carolina Life Insurance Practice Exam

If the current interest rate on an annuity is higher than the guaranteed rate, which interest rate will the annuity owner receive?

1. The higher current interest rate

2. The guaranteed interest rate

3. The average of both rates

4. The lower fixed rate only

The correct answer is: The guaranteed interest rate

In the context of annuities, the owner of the annuity will receive the guaranteed interest rate when the current interest rate is higher than this guaranteed rate. This is because the guaranteed interest rate is the minimum rate specified in the contract; it provides a level of security for the policyholder. Annuities are designed to provide stability and a reliable income stream, hence the guaranteed rate ensures that regardless of market fluctuations, the annuity owner receives at least this agreed-upon rate of return. Therefore, even if the current interest rate exceeds the guaranteed rate, the annuity’s terms hold the policyholder to the guarantees set forth in the contract. This feature protects the annuity owner from potential market downturns, ensuring a steady growth of their investment according to the guaranteed rate.