Fixed Annuity Interest Rates Need Fixing

Other factors repel new money sales away from FAs. One is that insurance companies are making it harder for clients to buy FAs and for agents to sell them.

For example, one top rated company requires all these forms: 4-page application, 3-page disclosure form, suitability form, verification of identity form, beneficiary form, and another form if the FA is owned by a trust. And that’s just on a new money sale. If the sale involves a transfer from another company, more forms are needed: replacement form, transfer form and any other forms required by the surrendering company.

That’s way too many forms. Banks, mutual funds, and the federal government don’t require that many forms or that much disclosure.

Another factor is that the insurance industry has not spent enough resources to educate the public about the advantages of annuities. The result is that although industry professionals know that annuities are a great way to accumulate or distribute wealth, the general public knows very little about them.

Additionally, the FA image is being defined by non-industry people. Think about it–when was the last time you read a positive article in the general media about FAs?

Another factor has to do with how the companies handle renewal rates. There were more FAs “on the books” in 2006 than there were in 2001. As those products matured, many insurers dropped the renewal rates to contract minimums. Because money seeks the highest rate, a very high percentage of the matured contracts were exchanged for new contracts with higher rates. This was done through internal and external exchanges.

What’s more, in 2006, many people cashed in their FAs, paid the tax and put their money in certificates of deposits at banks and savings and loans. That is something I have never seen before in my 30+ years in the insurance business.

Typically, this money flowed into 1-year CDs that were paying 6% interest. When I asked clients what they were going to do at the end of the year, many took a page from Scarlett O’Hara in Gone With The Wind: “I’ll worry about that tomorrow.”

The insurance industry had better worry about falling new money FA sales today. The industry has to figure out a way to pay higher rates in its FAs if its wants to recapture market share. Otherwise, it will just keep picking the bones of each other’s companies through FA exchanges.