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.