The multi-year guarantee (MYG) annuity sales rally is over.
The average rate on a one-year MYG dropped to 1.4% in August 2009, down from 3.4% a year earlier, and the 5-year dropped to 3.1% from 4.4%. (Data from Fisher Annuity Index, Dallas, as reported in the August 2009 Annuity Sales Buzz, an e-newsletter published by National Underwriter.)
Although the August 2009 MYG rates were still above the 1% paid on typical bank 1-year certificates of deposit, it wasn’t enough to get people buying.
In 2010, based on past cycles, bank rates should start rising at a faster rate than bond yields. That means MYG sales will be off until the interest cycle turns again.
What about prospects for indexed annuities? On March 31, 2009, the S&P 500 closed at 797.87 and the average 1-year CD rate was over 1%. In this environment, it is not surprising that indexed annuity sales hit a new record in the second quarter.
It appears that at least some of that MYG business was swayed to indexed annuities that marketed a first-year premium bonus as a guaranteed yield.
Also contributing to IA sales is the fact that the products having guaranteed lifetime withdrawal benefits offer growth rates or large bonuses–and some consumers may have confused these for a current yield.
Even without income riders, indexed annuities have a strong story to tell; it simply needs to be presented well.
CD owners may balk at buying the IA with the 6% interest cap because they fear they might earn zero if the index goes down. However, they might be told, “If you move to the annuity, you may lose the 1.1% that the bank is paying, but if you stay at the bank, you will lose the potential to make 6%. Which is the greatest potential loss?”
It should be noted that IA sales doubled when the last bull market began.