At What Interest Rate Would People Stop Buying Fixed Annuities?
November 10, 2011 by Brian D. Mann
November 09, 2011
This article’s title is an intriguing question, and it appears the answer is that they would never stop. Ever since I entered the industry, interest rates have been dropping, and yet fixed annuity sales have continued to rise.
Part of the reason sales continue to rise is that as interest rates on annuities fall, so do interest rates on everything else. The safety and tax deferral offered by annuities are advantageous regardless of interest rate levels, and interest rates on annuities are consistently competitive with other fixed rate financial products.
In fact, it seems that the general public’s appetite for safety continues to increase. “More money has been lost reaching for yield than at the point of a gun” is a popular financial quote that was originally said by Raymond DeVoe of Legg Mason Wood Walker in 1995. People have searched for higher yields in risky assets such as stocks, they have gotten burned with losses over the last decade, and they have now retreated to safer alternatives such as annuities.
Another part of the reason that fixed annuity sales have continued to rise is that the industry continues to adapt to the economic environment by innovating new product solutions. As fixed interest rates fell in the 1990’s, the industry created indexed annuities. As interest rates have fallen further in the past few years, the industry changed its focus to providing guaranteed lifetime income.
You can see the progression in product from fixed to indexed to lifetime income in LIMRA’s latest industry sales survey. In the first half of 2011, sales of traditional fixed interest rate annuities have held steady at a level below their historical high, but indexed annuity sales are close to their record high, and immediate annuity sales are setting new sales records.
What is interesting about this product progression is that each generation of product takes us closer to our industry’s core competency of providing insurance protection. Whereas a traditional fixed interest rate annuity is similar to a bank certificate of deposit and has relatively few insurance elements, an indexed annuity clearly has an insurance aspect, as our clients have interest crediting that is based on a market index but are protected from market volatility. Products that are hitting all-time sales records now – immediate annuities and annuities with guaranteed lifetime withdrawal benefits – have an even more obvious insurance aspect, that is, they provide insurance protection against longevity risk.
What could be next on the horizon? If what is happening in single premium life insurance is any indication, annuities that provide long term care (LTC) benefits could be the next big thing. They often require health underwriting, so the insurance aspect is even more obvious on them. As to what sort of interest rate consumers will demand on these annuities, the answer could easily be zero. Some of the leading life insurance contracts with LTC benefits provide no prospect of cash value growth, yet they are very popular with consumers.
Thus, as I hear the Federal Reserve Bank pledging to keep interest rates low for at least the next two years, I don’t worry about our industry. There’s no question that fixed annuity sales will continue to take place, even if interest rates fall further.
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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