How does interest rate risk relate to annuities?

Interest rate risk is a significant factor to consider when evaluating annuities. When current interest rates rise, newly issued financial products, including annuities, tend to offer higher returns to attract investors. As a result, existing annuities that were issued at lower interest rates become less attractive to investors since they may not yield as much compared to the new offerings.

This leads to a decrease in the market value of existing annuities; potential buyers may prefer new annuities that offer better rates. Consequently, the attractiveness of older annuities diminishes in the eyes of investors, creating a relationship where rising interest rates negatively impact the desirability of pre-existing annuity contracts. Thus, understanding this connection helps individuals make informed decisions regarding their investments in annuities amidst fluctuating interest rates.