Finding the best rate on multi-year guaranteed annuities (MYGAs) for your clients is easy. But knowing what’s behind that rate — the tradeoff — can be challenging.
Now may be the perfect time to educate yourself on what to look for, as 2019 may well be the year that MYGA sales soar higher than we’ve seen in many years.
(Related: Buyer (and Seller) Beware)
The 2% to 3% interest rates we’ve painfully endured for the past decade are quickly being replaced by 3% to well over 4% guarantees. Based on the trending of the Federal Reserve rates and 10-year Treasury notes, we can anticipate continued increases in MYGA rates across the board, opening up huge opportunities in the field.
So, what are those tradeoffs that either you or the client must accept in order to get the guaranteed rate?
When is the last time you’ve seen a carrier rated A+ with AM Best rank in the No. 1 spot with any length of surrender for MYGA rates? If we look at MYGAs with the highest rates today — specifically three- to 10-year MYGA rates — six of the top eight spots are filled by carriers rated B or B++. Carriers rated A+ do not have to offer the best rate in order to secure business.
Does this make sending money to a B-rated carrier bad? Absolutely not! It’s a decision that is between you and your clients depending on your comfort level in doing business with a B-rated carrier.
I’ve had agents lose cases as a result of only showing max rate with a B-rated carrier. Some clients are passionate about ratings, and if you ask the right questions, you’ll unearth that urgency for top ratings. If anything, you can always hedge your bets with the max-rate scenario on B paper with the best rate on A-rated paper to give your clients the option to choose.
Sometimes it is you, the agent, who makes the sacrifice for that max rate top spot. Essentially, you subsidize the max rate by having your commission reduced considerably. Some agents consider the reduced commissions as the cost of doing business, and they figure they’ll make up for any losses by cross-selling other products or services to the client.
When you’re aware that some carriers can lower commissions in order to offer great MYGA rates, you can determine upfront — before offering the MYGA — if that’s a tradeoff you’re willing to accept. That’s better than a surprise later, when lower compensation arrives. Keep in mind that these reductions also may be in concert with reductions to commissions due to the client’s age.
3. Liquidation for Terminal or Chronic Illness or Long-Term Care
In annuity products, we’re used to having fairly liberal liquidation options for chronic or terminal illness as well as long-term care (LTC) events. A standard chronic or terminal illness waiver, for example, would call for all funds to be 100% liquid after the first year of holding the contract and 60 to 90 days of consecutive confinement in a qualified care facility. These sorts of features are items that are part of the pricing of an annuity product actuarially. So, one way to give the client a better rate is to reduce or eliminate liquidation for terminal or chronic illness or LTC.
Limited liquidity for such events does not make a MYGA bad, but you should remember to check this benefit if a MYGA has an attractive rate.
I’ll never forget a conversation I had 20 years ago with an agent from a small community who had sold such policies, not understanding that they weren’t liquid for LTC events. So when one of his clients went into confinement and couldn’t access their money without incurring significant surrender charges, the client felt betrayed. The damage was devastating and long-lasting for the agent. Word of the situation spread in this small community and, in his words, did irreparable damage to his reputation. As a direct result of this innocent oversight, the community no longer trusted him to do the right thing. This impacted not only his ability to sell annuities, but also his overall business.
You can avoid a similar nightmare by asking clients upfront if they have an existing LTC policy and, if they do, making sure you understand the policy limits — what the LTC policy will cover or not cover and the dollar amounts of daily and monthly benefits. You’ll also want to understand if it is a reimbursement or indemnity policy and if they have ample assets to cover health care costs.
With a full discovery of what the client has already done to mitigate terminal or chronic illness and LTC events, you can then truly determine if liquidation is essential or nonessential to the clients’ overall benefit.
4. Free Partial Withdrawals
Another part of the pricing of an annuity contract is the liquidation as it relates to the free partial withdrawal features of the contract. Some will provide 10% access, beginning day one, while others might provide 10% after year one and still others might reduce that to 5%. Some MYGA contracts might restrict your clients to interest-only distributions, and some annuities will allow for no free partial withdrawals at all without incurring surrender penalties. As a general rule, the more generous the free partial withdrawal contractual guarantee, the less generous the carrier can be with the interest rate guarantee.
You must analyze how much access is required to accommodate the overall goals of the client. I’ve seen many top agents use these privileges as part of the overall planning for clients to either supplement the client’s income or even fund additional objectives like life and LTC insurance products, while other agents get unpleasantly surprised by the restrictions and struggle to help clients reach their goals.
5. Market Value Adjustment (MVA)
MYGAs with a market value adjustment (MVA) feature have the potential to offer higher interest rates than traditional fixed annuities without the MVA feature. The tradeoff for that higher rate is that your client might pay additional surrender penalties on top of the normal surrender charges. The insurance company can offer better rates because the MVA, in theory, acts as a deterrent for the client to cash in the policy early. Many insurance agents are surprised to hear that a fixed annuity can have MVAs.
An MVA is applied to early withdrawals that exceed the free withdrawal provision and can increase or decrease the value of the annuity depending on the movement of interest rates in relation to the guaranteed rate. If interest rates are higher at the time of the withdrawal, a negative MVA will apply, resulting in a lower withdrawal amount. Lower interest rates at the time of withdrawal will result in a positive MVA.
The important thing to keep in mind is that that if the client holds the contract to the end of the surrender period, there is no impact — positive or negative — with a multi-year annuity that has an MVA. But if you offer your client an MVA, be aware of the double-whammy surrender charges.
6. Maturity Options
Another product feature that you should be fully aware of when recommending a MYGA with a great rate is the maturity option at the end of the guaranteed-rate period. With some carriers, a MYGA’s surrender charges merely expire at the end of the contract, and the annuity will continue to earn interest. Others provide a period of time, usually 30 days, to renew the annuity for another guaranteed period with new surrender charges, elect a payout option or surrender the policy with no surrender charges or market value adjustment.
A MYGA with a great rate can turn sour if you do not get to your client before the insurance company automatically enrolls them into another annuity. Imagine a client learning too late that a MYGA dropped from earning 3% to 1% because you didn’t tell them about the maturity option. I have seen many producers and clients get burned because they failed to make decisions during that 30-day period. The client ends up renewing a contract at a lower-than-anticipated rate, and the producer was not paid another commission. Be sure you are keeping track of those renewal dates to ensure all parties are getting the deal they are looking for versus the deal they were contractually handed.
One way to find the best solution for your client is to work with a partner t hat understands the MYGA tradeoffs.
A good insurance marketing organization (IMO) partner in this business can help you weed through what is sizzle and what is steak. The IMO can help you find what might be considered anomalies in each contract, as well as the products that are true gems.
Anyone can recite rates. It takes a good partner to know about the importance of details beyond the rate — factors such as carrier ratings, compensation, liquidation measures, free partial withdrawals, MVAs and maturity options.
With MYGA sales destined to increase, having a partner who can help you wade through all of the information is as important as the rates themselves.