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Life Health > Annuities > Fixed Annuities

Fed Rate Hike Could Boost Floating-Rate Annuities

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What You Need to Know

  • The Fed increased the target federal funds rate range to 1.5% to 1.75%.
  • Higher rates can increase earnings on life insurance company investment portfolios.
  • For clients, one concern is whether and how to time a fixed-annuity purchase decision.

U.S. life and annuity insurers are trying to be polite about the Federal Reserve Board doing what it can to push interest rates up 0.75 percentage points.

On Wednesday, the Fed moved to increase the target range for the “federal funds rate” — the rate banks use to lend reserve balances to other banks overnight — from 0.75% to 1% to 1.5% to 1.75%.

The move is intended to cool inflation by reducing the amount of cash people and companies can use to make purchases.

Increases in interest rates could hurt life and annuity issuers in some ways but also help them,  and it could also draw attention to products designed for periods of interest rate uncertainty, such as non-variable annuities with floating interest rates.

What It Means

Offering your clients products with attractive benefits guarantees could change from being something financial services companies do just to be polite to something they really want to do.

The Big Picture

If banks increase rates on certificates of deposit, and rates on money market funds improve, that could lead to “disintermediation,” or a tendency for consumers to shift cash from fixed annuities and fixed cash-value life insurance into other “safe money” instruments.

Higher rates could also hurt sales of life insurers’ mutual fund affiliates, depress asset-based earnings at variable life and variable annuity operations, and affect the performance of some types of derivatives life insurers use to manage life and annuity product investment risk.

But higher rates could also lead to big increases in yields on the trillions of dollars of bonds in life insurers’ investment portfolios.

Bond yield increases could be especially helpful to insurers with large fixed life insurance, fixed annuity, long-term disability insurance and long-term care insurance operations.

Product Menus

Life insurers are also looking at their product menus to see what options they already have on the shelf for clients looking for ways to handle rising interest rates or interest rate uncertainty.

Security Benefit, for example, is pointing out that it already offers the RateTrack Annuity contract: a single-premium, deferred fixed annuity that pays a higher total rate during periods when interest rates are going up.

Security Benefit can call the annuity a fixed annuity or non-variable annuity because it offers a guaranteed minimum interest rate. Today, for example, the guaranteed minimum interest rate is 1%, according to a rate sheet that took effect Monday.

The company is actually offering a higher, 1.6% guarantee period base rate on a 5-year contract.

The product also offers a floating-rate addition, which is tied to the performance of the 3-month Chicago Mercantile Exchange Term Secured Overnight Financing Rate (SOFR) reference rate.

The current 1.43% SOFR boost will increase the total credited interest rate for the first year the contract is in effect to 3.03%, Security Benefit says.

The interest rate cap for the year will be 5.1%.

Other companies can help clients manage interest rate uncertainty by selling them annuities with short terms or via a “laddering” strategy, which involves feeding set amounts of cash into new annuities at set intervals. This approach leads to overall average annuity portfolio crediting rates that rise gradually when interest rates are rising and fall gradually when rates rate falling.

The Search for New Ideas

David Byrnes, head of distribution at Security Benefit, said in a new commentary that he thinks recent Fed hikes may make consumers look for alternative bonds.

“The dismal performance of the bond market this year, lackluster earnings in Q1, inflation fears and additional expected rate hikes all contribute to an environment where consumers are preparing for more volatility,” Byrnes said.

Floating-rate annuities could benefit from the hunt for products that can preserve principal as interest rates rise, he added.

(Image: Adobe Stock)