Treasury rates are low and will likely remain that way until the economy shows tangible signs of recovery.
The Federal Reserve has tamped down Treasury yields through quantitative easing and bond buyback programs in order to stimulate the economy. Federal Reserve Chairman Ben Bernanke has publicly stated that the Fed will look to keep bond yields low until the employment numbers improve. And low Treasury yields equate to low fixed and fixed indexed annuity rates.
However, the sky is not falling for annuity producers. Even with low interest rates, fixed annuity products are generating inquiries from consumers who are interested in truly diversifying their investment portfolios from the whipsaw movements associated with the overall equity markets.
In response, insurance carriers have introduced new annuity products and riders to meet consumer demand. Traditional fixed policies now give consumers the opportunity to exchange liquidity for higher overall returns, while new income riders are offering attractive growth opportunities and, in some cases, leveraged payments for long-term care expenses.
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Here are five developments keeping fixed and fixed indexed annuities attractive to consumers.
1. Tradeoff options
It’s certainly not hard to beat the returns on most any certificate of deposit these days. Bank lending rates are at all-time lows and haven’t really budged for the last four years. Three- to five-year fixed annuity accounts usually best comparable CD returns by a point or more.
On this front, insurance carriers have become more creative. Fixed annuity buyers can now lock in even higher yields if they are comfortable giving up some common annuity liquidity features. Lump-sum death payouts, monthly income, required minimum distributions and 10 percent free withdrawals can now be voluntarily excluded from certain fixed annuity accounts in order to preserve higher yearly returns.
Consumers willing to forgo some or all of these liquidity features can enjoy better yields on an annuity term that best suits their investment needs. While these types of plans are not appropriate for every investor, they do offer flexibility for those who are primarily focused on reliable, fixed, tax-deferred growth in an otherwise low-yielding environment.
2. Income riders
The primary goals of most annuity buyers are investment safety, sustainable growth and future income. Those who have solely relied on dividend stocks and bond portfolios to provide income for their retirement needs have, at times, struggled through the boom-and-bust market cycles of the last 10 to 15 years.
I have always argued that to truly be diversified, you should consider having a portion of your portfolio, especially one that you will rely on for future income, detached from the equity markets. Indexed annuities coupled with an income rider offer such diversification while also offering the added benefit of guaranteed lifetime income.
Consumers are growing more comfortable with annuities, and some investment journals and periodicals are now covering annuity accounts in a more positive light. Financial writers usually promote SPIA and variable annuity accounts when discussing lifetime income streams. Perhaps they will eventually give fixed indexed accounts the long overdue accolades they most deserve.
But let’s be clear — if you are selling indexed annuities on 20 percent annualized returns, you are not doing your clients, yourself or the annuity industry any favors. Low rates are also negatively impacting the spread, caps and participation rates associated with FIA products. Indexed annuities simply can’t offer 7 percent annual point-to-point caps like they used to.
That’s OK. Income riders are picking up the slack by offering attractive yearly roll-up opportunities for those who want to create a dependable future income stream. When coupled with a longer term indexed annuity, income riders are offering large upfront bonuses (8 percent to 12 percent rates are not uncommon), high single-digit roll-up percentages and reasonable lifetime withdrawal factors.
Most income riders can be activated after only one year, and the allotted income stream is not subject to surrender penalties. Consumers nearing retirement and planning for future income understand the need for safety, reliable growth and steady income. Income riders, when coupled with indexed annuities, provide the peace of mind that few other assets can.