By Warren S. Hersch
The multi-year guarantee or CD-type annuity may not get much attention in headier times but they’ve been enjoying a boom in sales since the onset of the economic downturn.
“There has been a fair amount of interest in CD annuities of late,” says Keith Meyers, a certified financial planner and principal of Keith Meyers Inc., Cannon Falls, Minn. “The products are increasingly seen as an alternative to bank CDs.”
Adds Henry Wetherby, a chartered financial consultant and principal of Wetherby and Associates, Bloomfield, Conn.: “A lot of people are now very attracted to the CD annuity. The product offers a level of protection to conservative investors who are looking to safely park their money for the short-term.”
The CD annuity, a type of fixed annuity, offers a multi-year guaranteed rate of interest that typically lasts for the duration of the surrender charge period. Standard fixed annuities, by contrast, generally limit the guarantee for an initial period, the interest rate fluctuating thereafter with market rates.
Why is the product so appealing now? Sources say that risk-averse investors can now secure better rates in multi-year guarantee annuities than they can with traditional fixed income investments–notably bank certificates of deposit, money market funds and treasury notes–for which yields are at historic lows.
And the longer the guarantee period, the better is the multi-year rate. Timothy Gahler, a senior annuity product specialist at Thrivent Financial for Lutherans, Minneapolis, Minn., says the payout on the company’s MYG 10-year annuity is approximately 200 basis points more than is offered on the 3-year version, which is the minimum duration generally offered on multi-year guarantee annuities.
Given the prospect of market rates falling still further, adds Gahler, now be the best time for advisors to market these annuities to clients. While the interest rate for bank CDs is generally tied to the going rate offered on Treasuries, he explains, many multi-year guarantee annuities (including Thrivent’s) invest in higher-yielding corporate bonds, thereby permitting a higher payout on the annuity.
Should market rates fall further, the spread between Treasuries and corporate bonds will increase, as the price of bonds is inversely related to the interest rate. Such a drop would make multi-year guarantee annuities not only more attractive relative to other CDs and treasuries, but also to standard fixed annuities offering fluctuating rates.
“If the Fed cuts Treasury rates, it’s our belief that in 1 or 2 years, we’ll see interest rates fall,” says Gahler. “If a client buys a standard fixed annuity and gets a high interest rate this year, conceivably that rate will be cut next year because of the market. So this is the prime time to lock into an interest rate for multi-year period.”
That message is evidently getting through to customers. Gahler says that Thrivent sales of multi-year guarantee annuities totaled $136 million during the last 15 months, a nearly 275% gain over the 2003-2007 period, when revenue totaled just $50 million for the 4-year period.