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Can Fixed Annuities Survive in an Era of Low Interest Rates?

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Much as New Year’s Day prompts Americans to commit to achieving healthier lifestyles, the federal tax deadline is a perennial call to action to get their financial lives in order. As a consequence, many producers see an increase in client interest to get serious about retirement planning and to bring order to what can be a hodge-podge of investments.

One common strategy for giving clients more control over their investments is a rollover of existing 401(k) and other assets into an IRA. This is a positive step, in that it generally allows these clients to enjoy greater investment options and lower expenses. Producers are increasingly becoming aware of a complementary strategy that can help these clients solidify their plans for retirement income as well—the fixed index annuity.

This might seem hard to believe, given the historically low interest rates we saw in 2011. Despite a slight rise in the three-month LIBOR rate toward the end of the year, the rate spent most of the year in the sub 0.4 percent range. Such rates have made many interest rate-sensitive options, from money market accounts to certificates of deposit (CDs), much less attractive. Yet, as 2011 came to a close, LIMRA proclaimed that fixed index annuities were on track to enjoy a record-setting year, with 2011 third-quarter sales matching the record level of $8.7 billion set in the third quarter of 2010.

The fact is that, regardless of the economic climate, fixed index annuities provide a very likeable combination—upside potential and flexibility in allocating between fixed and indexed strategies—for clients seeking to build retirement income. Unlike traditional fixed annuities, a fixed index annuity provides owners with interest-crediting potential that’s connected to the performance of one or more benchmarks or market indices. The owner has the option of putting all or part of the annuity’s value in the index, with the fixed-interest component applying to anything remaining. The owner gets a credit if the index rises, yet enjoys principal protection if the index goes down. The owner can always reallocate between the fixed and index components of the product on the contract anniversary date.

Where will rates go?

Despite these core attractions, fixed index annuities can still represent a sales challenge for producers, due to the prospect of future rising interest rates. When interest rates have been this low for this long, producers and clients alike worry that rates will rise in the near future, which can make any range of interest rate-linked instruments seem less attractive.

Insurers understand this challenge and recently have launched new refinements to the fixed index annuity product to mitigate the effects that rising interest rates could have on performance. Several carriers have introduced interest rate-based crediting strategies that use a point on a published “swap curve” as the benchmark rate. ING recently launched a new interest-crediting strategy that bases credit on an increase, if any, in the three-month LIBOR. The strategy, available on some of the company’s fixed index annuities, credits interest to the consumer if the three-month LIBOR rises from one annuity anniversary to the next. Here’s how it works:

  • If interest rates rise while a client’s funds are allocated to the interest rate benchmark strategy, he or she gets a credit, no matter how the equity markets might perform in a contract year.
  • Should the benchmark rate drop during a contract year, the owner gets no credit, but his or her principal is protected.
  • The annuity owner can mix things up, using the interest rate benchmark strategy in some years and not in others.
  • Working with the producer, the owner can take advantage of the flexibility of the product to create a diversification strategy, varying the amounts in the product’s guaranteed rate, equity index and interest rate benchmark options.

Since the interest rate floor resets on every contract anniversary date, just as annuity index floors do, the client has the potential for new credits based on interest rate increases, regardless of the previous year’s ups or downs.

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Getting off the dime

Many Americans are stuck between the perceived perils of stock market volatility and the fear of locking into current interest rates that may prove unsatisfactory if rates rise down the road. Unfortunately, for many, the answer has been to maintain their liquidity by remaining invested in cash. While the low interest they receive is itself a drawback, the bigger impact is harder to see: It’s the missed opportunity to pursue growth, which they must forgo in the interest of greater short-term security.

Producers must be prepared to help their clients make reasonable assessments of the risks inherent in “sitting out the turbulence.” By alerting clients to new options such as the interest rate benchmark option in a fixed index annuity, producers will be helping these clients take confident steps toward a more secure retirement.

Fixed index annuities: Setting the record straight

Clients may have misconceptions about fixed index annuities that can dissuade them from purchasing one even if it makes good sense for their retirement goals. Producers who understand and address these misconceptions can more aptly clarify the potential benefits of fixed index annuities, their performance and costs.

Common misconception


Fixed index annuities have hidden fees and charges.


There are no direct fees in most standard fixed index annuities. If the buyer wants extra features, such as enhanced death benefits or guaranteed income, then he or she is choosing to pay the associated fees.

The limits on crediting in fixed index annuities are there only to increase insurers’ profits.


Insurers purchase hedges to cover the cost of index credits paid to the annuity owner, and the cost of those hedges determines the limits that are set for each annuity. They don’t get a windfall if the market or interest rate outperforms.

The surrender charges are much too high, and you can’t get to your money if you really need it.


Annuities by nature are designed for the long term. As such, annuity contracts have surrender charge schedules. To give consumers some access to their contract’s funds, many insurers allow withdrawals of up to 10 percent of the annuity’s value each year without penalty. Many annuities comply with the 10/10 rule, which limits surrender charges to 10 years and 10 percent in the first year of the annuity. Surrender charges diminish over time, vanishing after 10 years for each premium payment.

Kenneth L. Brown is the vice president of sales development & strategic Support for ING U.S. Insurance’s annuity and asset sales business, overseeing marketing, product development, regional wholesaling, sales training and development, and wholesale operations for the company’s annuity business.

Annuities are products of the insurance industry. They are not deposits in, obligations of, or guaranteed by a bank or any other financial institution and are not insured by the FDIC. Fixed index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and earnings potential that is linked to participation in the growth, if any, of an index or benchmark.