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April 15, 2007 at 04:00 PM
Here we go again–the next financial “crisis” has arrived.
One year ago, mortgage companies were coming under scrutiny for seemingly unscrupulous sales practices: charging higher mortgage rates for subprime mortgages (those with higher risk of default due to the customers having lower credit scores or little to no money down).
Today, nothing is being said about the interest rates charged for the increased risk. Rather, all the talk is about how the mortgage companies are losing their shirts because mortgage default rates in this segment are nearing an all-time high. What does this tell us?
This is another example of “irrational exuberance.” The old saying that “what seems to be too good to be true often is” comes to mind. Too many times, consumers become enamored with the upside potential of a product without concerning themselves with–or perhaps even knowing about–the risk. Then, when risk-related problems emerge, they are shocked, angry and worried.
Think of this in terms of the financial services industry. How many customers bought the upside sales pitch only to see the product crash and burn, their fortunes along with it? Most professionals have seen such customers, and the outcome invariably points to this financial understanding: Most individuals are not knowingly risk seekers. Many are afraid of outliving their assets. Ultimately, they want guarantees.
Fixed annuities have certainly enjoyed a surge in popularity over the past few years for exactly that reason. There’s no other non-underwritten financial vehicle that will provide guaranteed payouts for an individual’s lifetime, even if that’s decades away. This product feature responds perfectly to the lessons learned from people who experienced a crash and burn.
Now, due to some of newer twists being added to fixed annuities, customers will be even more willing to buy these products than in the past.
A case in point is the addition of long term care riders to fixed annuities. While most annuities have waiver of surrender charges for nursing home care, annuity carriers will soon be offering LTC riders too.
