By Linda Koco
Contributing Editor, InsuranceNewsNet
March 9, 2011 -- Today’s low credited interest rates in fixed annuities may be a turn-off to certain customers, but specialists are finding ways to help customers keep those rates in perspective.
Rates for this year are even lower than a year ago, points out Danny Fisher, publisher of The Fisher Annuity Index, Dallas. The Index tracks average FA rates of over one-year periods.
For example, as of Jan. 31, the average rate for five-year rate guarantee FAs was 2.23 percent, he says. That’s for nearly 600 products issued by almost 70 carriers. “A year earlier, the average rate was 2.64 percent.”
But a similar pattern holds for five-year CD rates and treasury bonds, with interest rates in both products lower now than a year ago. So, FA rates are tracking with trends in the overall environment, he says.
In February, FA rates did start to tick up, he notes. Also, a few carriers have bumped up their FA crediting rates by 10 or 20 basis points for competitive reasons. Even so, only a handful of FAs pay above 3 percent, and the highest-paying five-year FA was crediting 3.5 percent at the end of February, he says.
Fisher’s conclusion: “For those who try to compete on rate in this environment, business is as slow as molasses.”
Handling the cases
One way Fisher is handling cases now is to suggest that the client split out the money. That is, put some in a three-year FA and some in a five-year FA. “You have to go out at least three years to get anything by way of interest rate at all,” he explains.
Sometimes, he may also recommend putting a small portion into a seven-year FA that pays 4 percent.
Most clients are electing to have the bulk of their FA money in five-year products, he says.
Fisher is noticing that some high net worth clients with over $1 million to place will choose an FA paying a higher rate. They will do that even if the A.M. Best’s rating of the issuing company is lower than that of another carrier offering five-year FAs at a lower rate.
“It’s surprising, the number of wealthy clients who want that,” he says. “It might be as many as 10 percent of my clients,” Fisher says.
Do clients compare the FA rates with rates being paid by bank certificates of deposit (CDs)?
“Some clients do bring that up, especially if they’ve just had a CD mature and the new rate is at a rock-bottom low,” says Fisher. When they see that the FA rates are higher, they are interested, he says. “In fact, we’re getting more new money (for FAs) this year than we did a year ago.”
Fisher sees something similar happening in the multi-year FA market. Here, when the policy matures at the end of the rate guarantee period, the renewal interest rate often drops to the floor rate, he says. If that happens, clients start asking about whether they should roll their money into a new FA that pays a higher rate.
“If the floor rate is 2 percent, that’s usually a slam-dunk,” says Fisher. “But if the floor is 3 percent, there’s always a question about whether to roll or not, especially since the money is now liquid” and available rates aren’t much higher.
Offer an indexed annuity instead
Chuck Preti, owner of Life & Annuity Brokerage Solutions, LLC, Niagara Falls, N.Y., says that FA agents in the independent distribution channel are having success by offering FAs that credit interest based on an external index—the fixed index annuities.
In this market, the big attraction today is policy features, not the crediting rate, says Preti, whose firm works with distributors and carriers on product development and implementation.
By features, he means the guaranteed lifetime withdrawal benefits (GLWBs) and the enhanced death benefit guarantees.
The GLWBs enable policyowners to withdraw a stated amount of monthly income for life. The enhanced death benefit guarantee says the death benefit will roll up by 4.5 percent to 6 percent a year, depending on product selected. Some index annuities cap the roll-up after year 10 or 12, Preti adds, noting that this doesn’t appeal to people in their 30s and 40s but doesn’t much matter to those in their mid- to high 60s.
“Consumers love these products because they don’t lose control of their money,” Pretty says.
It’s not that consumers don’t care about interest rates, he adds. But in today’s environment, “on a scale of one to 10 with 10 the highest, their concern about rate is roughly a two or a three. Meanwhile, their interest in the features that come with the fixed index annuity is at about eight or nine.”
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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