The Highest Rate is King
November 15, 2022 by Sheryl J. Moore
Over the past few years, the annuity industry has begun seeing a new trend that has seismically shifted the dynamic of annuity sales. Startups are getting into the indexed annuity market by first developing a multi-year guaranteed annuity (MYGA) with an aggressive credited rate, gaining distribution, and then transferring their focus over to indexed annuities. Be aware, however, that the credited rate on these MYGAs is typically higher than their non-startup peers’ annuities.
MYGAs are experiencing higher credited rates in general, simply because the 10-year Treasury is floating just below 4.00%. This allows annuity product manufacturers to offer more attractive credited rates to their annuitants, in turn. Several months ago, you’d be lucky to find a 5-year MYGAs crediting as much as 4.90% interest. This is driving demand for MYGAs, and therefore increasing sales of this commoditized product, so that it has more share of the market than any other type of deferred annuity.
Speaking of higher rates, indexed annuities have also been the beneficiary of the benefits offered by a higher 10-year Treasury rate as well, Severy months ago, it wasn’t unusual to find cap rates on annual point-to-point indexing methods floating around 4.50%. Today, these same annual point-to-point caps are as high as 25.00% annually. Unbelievable! And if you thought the cap rates were high, wait until you check out the participation rates that are as high as 400% on some multi-year indexing methods. It is definitely a return to the early 2000s when it comes to indexed annuity rates today.
By contrast, structured annuities are enjoying annual point-to-point caps of as much as 230%, with a percentage of losses covered up to 20.00%. So, if an annuitant is willing to accept a little more risk, and go with the structured annuity, the rate that they will receive will offer much more upside potential than its non-variable brethren.
We continue to see a focus on limiting liquidity on all types of annuities. There have been a number of new products touting interest-only withdrawals. Five percent penalty-free withdrawals have become the gold standard on most annuities, where 10% penalty-frees were the standard for decades past. The first annuity to be introduced with a 0.05% guaranteed annual return minimum recently launched. On a related note, most indexed annuities that are developed today have a guaranteed minimum interest rate of 0.05% credited on 87.5% of the premiums paid, for their minimum guaranteed surrender values’ calculations. We are even starting to see some products that pay only the minimum guaranteed surrender value of the annuity upon death. These are all just reminders that liquidity costs money. Despite the fact that product manufacturers are enjoying the benefits of better spreads, the (lack of) liquidity trends have persisted.
Riders continue to rise
We have seen an uptick in the development of Guaranteed Lifetime Withdrawal Benefit (GLWB) riders on indexed annuities, as well as structured and variable annuities. These riders guarantee that the purchaser will receive a guaranteed income stream for their life, while maintaining the flexibility to start/stop/change withdrawal amounts under terms of their annuities. Guaranteed Minimum Death Benefits (GMDB) riders pay an enhanced benefit upon the death of an annuitant (or owner.) These riders have been a focus of variable annuity product development over the past couple of quarters. On the fixed and indeed annuity fronts, ballout riders have made a comeback. These benefit allow the annuitant to cash surrender their annuity, penalty-free, should the credited rates/caps/participation rates fall below a set rate, upon renewal. These riders often overcome the “trust me” mentality of inforce renewal rates on non-variable annuities.
Next train arriving?
Lastly, we are seeing a huge focus on advisory annuities: fixed, indexed, structured and variable alike. These annuities do not pay a commission to the salesperson, but often allow for a fee to be deducted form the contract for asset management purposes. All indicators point to the Registered Investment Advisor being the greatest of new opportunity of the decade, in terms of annuity distribution. Insurance product manufacturers are catering to that believe in their new product development. However, with only 2.21% of new sales occurring through fee-based products, one has to wonder when the new distribution train will be arriving.