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.
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.
3. Next -generation income riders
Here again, insurance companies have become more creative with the release of the next wave of income riders. In the past, once income began, there was little the account owner could do but turn it off and on, depending on income needs.
Newer income riders offer the ability for the owner to set aside unused income for a one-time lump-sum distribution when the rider has been temporarily turned off. Additionally, income can usually be tied to joint lives (even with qualified money) and the owner does not have to select a single or joint payout until the rider has been activated.
And many accounts offer options allowing the owner’s income stream to grow after the income rider has been triggered. Riders can now be linked to inflation indexes or purchased with a predetermined growth percentage that will increase the allotted payments over time. It is important to note, however, that income streams allowing for growth will usually start at a lower level than ones that do not increase.
4. Long-term care assistance
Many annuities, either with or without an income rider, provide additional liquidity in the event the owner/annuitant needs convalescent care. This is helpful, of course, but it would not usually substitute for a traditional long-term care policy.
In order to add a new level of appeal to certain income riders, insurance companies are now offering income “doublers” and “triplers” in the event that long-term care is needed. Like most LTC policies, the insured must be unable to perform two of six activities of daily living or have diagnosed cognitive issues in order to double or triple their income stream.
Typically, the income stream will only provide a leveraged payout for a maximum of five years with these new riders and then revert back to the normal payout level — even if the income account has been depleted. Some riders will only provide leveraged income in a nursing home while others are designed for home health-care purposes.
Thus, LTC leveraged payouts may not substitute for a traditional or hybrid long-term care policy, but they can provide significant resources in times of financial need. It may go without saying, but it is important that consumers (and their families) understand any limitations with an income rider that leverages a payout for LTC purposes.
5. Income account access
Very few income riders are offered at no annual cost to the annuity owner. Consumers need to understand that in most cases they cannot walk away with the income account value. That is why you will hear some agents refer to the income account value as the “ghost account.” The monies are not readily available for anything other than to calculate a lifetime income stream.
Here again, there is a new wrinkle with certain policies. Various income riders now offer a death benefit provision. This feature usually has an annual cost to the contract, but it can be attractive for those concerned about wealth transfer and/or the possibility that they may not have accessed their income account before passing. Death benefit riders will offer lump-sum or five-year payouts of the income account value to named beneficiaries.
Knowing that their heirs may have access to significantly more capital at passing can help justify the added expense of an income rider. This feature is especially appealing for those who are not quite sure about their future income needs and do not want to pay solely for an income rider that may never be used.
In summary, there are several appealing annuity features in both the fixed and indexed markets that should resonate with many consumers. There are very few products providing portfolio stability, tax-deferred growth, lifetime income and, in some cases, leveraged long-term care funds. By touching on some of these key features and finding out what is most important to your prospects, you should see your annuity sales grow now and in the future.
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