Filed Under:Annuities, Sales Strategies

Can Fixed Annuities Survive in an Era of Low Interest Rates?

AP Photo: Richard Drew
AP Photo: Richard Drew

Much as New Year’s Day prompts Americans to commit to achieving healthier lifestyles, the federal tax deadline is a perennial call to action to get their financial lives in order. As a consequence, many producers see an increase in client interest to get serious about retirement planning and to bring order to what can be a hodge-podge of investments.

One common strategy for giving clients more control over their investments is a rollover of existing 401(k) and other assets into an IRA. This is a positive step, in that it generally allows these clients to enjoy greater investment options and lower expenses. Producers are increasingly becoming aware of a complementary strategy that can help these clients solidify their plans for retirement income as well—the fixed index annuity.

Insurers understand this challenge and recently have launched new refinements to the fixed index annuity product to mitigate the effects that rising interest rates could have on performance. Several carriers have introduced interest rate-based crediting strategies that use a point on a published “swap curve” as the benchmark rate. ING recently launched a new interest-crediting strategy that bases credit on an increase, if any, in the three-month LIBOR. The strategy, available on some of the company’s fixed index annuities, credits interest to the consumer if the three-month LIBOR rises from one annuity anniversary to the next. Here’s how it works:

  • If interest rates rise while a client’s funds are allocated to the interest rate benchmark strategy, he or she gets a credit, no matter how the equity markets might perform in a contract year.
  • Should the benchmark rate drop during a contract year, the owner gets no credit, but his or her principal is protected.
  • The annuity owner can mix things up, using the interest rate benchmark strategy in some years and not in others.
  • Working with the producer, the owner can take advantage of the flexibility of the product to create a diversification strategy, varying the amounts in the product’s guaranteed rate, equity index and interest rate benchmark options.

Since the interest rate floor resets on every contract anniversary date, just as annuity index floors do, the client has the potential for new credits based on interest rate increases, regardless of the previous year’s ups or downs.

Fixed index annuities: Setting the record straight

Clients may have misconceptions about fixed index annuities that can dissuade them from purchasing one even if it makes good sense for their retirement goals. Producers who understand and address these misconceptions can more aptly clarify the potential benefits of fixed index annuities, their performance and costs.

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Nichole Morford

Nichole Morford
Managing Editor

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