September 24, 2011
By Brian D. Mann
AnnuityNews.com
October brought another wave of interest rate reductions from fixed and indexed annuity carriers. In fact, one top carrier declared the annual cap rate on one of its top-selling indexed annuity products to be a mere 1 percent.
Let’s see: if the market index goes up for the year, the client gets 1 percent. And if it goes down, the client gets nothing. That sounds like a tough sell to me.
How did we get here?
This is as tough of a pricing environment as fixed and indexed annuity carriers have ever seen.
A very important interest rate to watch is the 10-year Treasury bond yield. Fixed and indexed annuity carriers typically invest in corporate bonds and other debt instruments that often have a 10-year maturity since so many annuities have 10-year surrender charge periods. And the 10-year Treasury bond yield gives you a good indication of the rate movements that will take place in those assets.
Since the global financial crisis began back in 2008, most central banks have been keeping interest rates low in an attempt to encourage lending, spending and economic activity. The result is a 10-year Treasury bond rate that is at historical lows, under 2 percent as of October 1.
Another important figure to watch is the VIX, a measure of the volatility of the S&P 500 index. Ever since the S&P 500 index moved by more than 4 percent for four consecutive days in August, volatility has been sky-high as the markets are very concerned about the possibility of a global recession, a breakdown of the Euro currency and further problems with the U.S. federal government deficit.
The result is a double-whammy for indexed annuity carriers. A low 10-year Treasury bond yield means their budgets available to buy stock index options have shrunk, and a high VIX means the cost of those option purchases has increased. The result is what we have seen this month: slashed interest and cap rates, reduced rollup rates on income riders and so forth.
Where do we go from here?
As a producer and a financial advisor, one thought you may have is that this could be a temporary condition and rates will get better soon – thus our clients should wait. I don’t think that’s the way to go.
First of all, the Federal Reserve Bank has committed to keep interest rates low through 2013. That’s a long time, and when 2013 comes, they may find they need to continue to keep rates low. Do you think the federal government wants to pay a higher interest rate on its debt? I doubt it.
Moreover, volatility could actually get worse. Can you imagine the chaos if Greece were to default on its debt; and then, if as a result, a few major European banks were to fail?
Since there’s no guarantee that tomorrow will be better, and it actually could get worse, what is the best strategy for our clients to pursue today?
In many ways, this environment causes us to look at the real unique advantage of annuities: they can provide a retirement income that is guaranteed to continue for the rest of our clients’ lives. Right now, rollup and payout rates on income riders continue to be attractive and offer an excellent value.
However, it is important for your clients to understand that in today’s low interest rate environment, it is quite likely that the charges for an income rider may cause the annuity’s account value to slowly decline over time. That’s okay, as long as your client expects it and fully anticipates using the income rider benefit to provide a lifetime guaranteed income stream. That makes the account value almost irrelevant.
Remember the unique value proposition of annuities. What else but an annuity can provide your clients with a steady, reliable income – an income that is guaranteed to continue for the rest of their lives and allows them access to their remaining funds in case their needs change? What else but an annuity can tell them right now what income they can rely upon for the rest of their lives, without guesswork?
Then, throw in the fact that many income riders provide additional benefits for a nursing home stay or other long-term care needs and annuities make a very compelling case – even in this dismally low interest rate environment.
Brian D. Mann is the Senior Vice President for Annuities and RIA Divisions at Partners Advantage Insurance Services. He is a multi-million dollar personal producer, coach and mentor for insurance professionals. Partners Advantage is a national insurance marketing organization that proudly serves as a one-stop shop to more than 20,000 independent insurance agents, financial planners and broker/dealers.
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