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September 23, 2007 at 04:00 PM
Thank goodness for annuity insurers that drop their renewal interest rates to the minimum.
During my 32-year career as an insurance agent specializing in fixed, deferred annuities, I’ve sold hundreds of millions of dollars in multi-year guaranteed rate contracts, sometimes referred to as “CD” type annuities. At issue, the initial guaranteed rates were high. When the initial guaranteed rate period ends, some renew at competitive rates but the majority renew at the contractual minimums.
If policy owners have the option of surrendering or transferring an annuity with a low renewal rate, most will take action to earn a higher rate. They simply will not accept low renewal rates of around 3% unless they are totally apathetic towards taking action or they have some need for liquidity in the near future.
When the rate drops to the minimum, a large percentage of policy owners will transfer their money to a higher guaranteed rate–and that’s why I’m glad there are companies that drop their renewal rates to the minimum. I get to make a sale and earn a new commission. The policy owner earns more interest. Everybody’s happy but the surrendering insurance company.
Quite frankly, if it were not for the low renewal rates, there are thousands of agents, including myself, who would probably be out of business.
New money annuity sales are a very small percent of business today. Most current annuity sales are coming from transfers of existing business.
Previously, I have written in this space about why the exchange ratio of sales to new money sales is currently so high. Basically stated, historically insurance company annuities have paid higher rates than certificates of deposit at banks. Now, banks are paying higher rates. Therefore, annuity sales with new money are down, causing the ratio of new money sales to exchanges to be lower than historical levels.
Recently, I performed a review of my in-force business. Some readers will no doubt find these statistics of interest:
o As of Aug. 1, 2007, 36% of current in-force annuities were from new money sales.
o As of the same date, 64% of current in-force annuities were exchanged from other annuities.
As my block of business and my clients continue to age, it’s natural for this ratio to be heavy on exchanges.
Regarding the 64% of current in-force annuities exchanged from other annuities:
