Why hanging on to your older fixed annuity is a solid bet
January 19, 2012 by Darla Mercado
Old contracts that hold 3% guaranteed minimum rates look
attractive
By Darla Mercado
January 18, 2012
Clients who decided to hold on to fixed annuities of the past are benefiting
from attractive yields, making the products a standout among fixed-income
investments.
Financial advisers note that some of their investors are holding on to
attractive three-, five- and seven-year fixed annuities that pay a guaranteed
minimum rate as high as 3%, even beyond the surrender period — and are relieved
to have them in this era of paltry fix-income returns.
“Older fixed annuities that have passed beyond their surrender periods are
highly liquid, possess a high level of safety and are paying around 3%, which is
often the policy minimum,” said James Heitman, founder of Compass Financial
Planning.
Getting a comparable return on Treasurys would require investors to consider
longer-term securities, he added.
Older fixed-annuity contracts drawn up several years ago were drafted at a
time when the carriers’ bond portfolios were performing well, thanks to higher
interest rates. That enabled the insurers to pass some of the benefit to the
client via an attractive credited rate that’s declared annually and an
attractive guaranteed minimum rate, while still making a profit on the spread.
However, as interest rates fell, putting pressure on fixed-income
investments, it’s become less profitable for insurers to continue paying
customers high rates, especially when clients choose to cling to their fixed
annuity after the surrender.
“There was a time when the 10-year Treasury was up around 5% or 6%, when if
someone didn’t surrender a contract, the companies were delighted to keep the
money,” said Judith Alexander, director of marketing at Beacon Research
Publications Inc. “But now with a 3% or 4% guaranteed rate contract, they’d
probably love for you to surrender it.”
As of late, insurers’ new fixed-annuity contracts are featuring a 1% to 2%
guaranteed minimum rate. Alternatively, insurers might promise a first-year rate
of 4% but drop it as low as 2% for subsequent years. Fixed annuities with a
guaranteed 3% floor are hard to find and few are on the market.
Meanwhile, clients who are still holding on to the more generous fixed
annuities aren’t taking income from them as the products approach the end of
their surrender periods.
Rather, they’re using them as an alternative to a CD and continuing to
accumulate interest on a tax-deferred basis, noted Scott Stolz, president of
Raymond James Insurance Group. “This is one of those products where the
surrender period ends and you continue with a rate that’s higher than what you’d
get on anything else,” he said.
“Clients who locked in these rates are happy; they’re the ones who want a
constant guaranteed rate of return without any risk to their principal,” said
Richard Dragotta, an adviser with LPL Financial LLP.