The Anxieties Of Aging

Annuities In Ascension

Spooked by volatility and less than stellar forecasts, clients return to safety

by Chris Conklin

Mr. Conklin is vice president of individual annuities at The Standard, where he has full P&L responsibility for the individual annuities line of business. Visit standard.com

Are annuities poised for a revival? That’s exactly what LIMRA is predicting, as it expects all annuity sales to increase 5 to 10 percent year over year in 2018, and improve up to 5 percent in 2019.That may come as a surprise, as many brokers and advisors have mixed feelings about annuities. That’s because clients are more likely to ask about short-term vehicles, like one-year Treasuries or money market accounts, that they assume offer higher potential for return.

So why does LIMRA see an uptick? It points to three key reasons: there’s more opportunity for return with insurers able to offer higher guaranteed interest rates; the repeal of the Department of Labor’s fiduciary rule makes annuity purchases easier; and forecasts of a down stock market in 2019 are likely triggering investors to seek secure ways to lock in gains and safeguard principal.

It adds up to annuity purchases becoming a more attractive option to help clients grow money. So you shouldn’t be surprised to find yourself fielding more questions about them. Here’s a quick refresher course so you’re prepared.

Lock in gains while still achieving growth

As interest rates rise, so do the guaranteed interest rates insurers offer on annuities. This makes their growth potential compare very favorably against vehicles like one-year Treasuries – which may carry a higher interest rate initially, but are prone to decreases over time. Annuities can help clients protect recent gains, while at the same time continue to consistently grow those gains.

Here’s a practical example to help illustrate that point: Consider that in 2007, the one-year Treasury’s interest rate was 5 percent – an attractive rate that drew in many investors. A $100,000 investment into a one-year Treasury, at that time, gained a respectable $9,568 in five years, looking at the available yields at the beginning of each year over that period. Now, consider an investor who purchased a $100,000 annuity that carried a 4.25 percent interest rate – guaranteed for five years. That investment grew considerably more in the same span, gaining a healthy $23,135.

You might be wondering how that math works out. The simple answer is that while the interest rates on the one-year Treasury started higher, they went down each of the four subsequent years, ending at a disappointing 0.29 percent. The annuity, with its locked interest rate, continued gaining at 4.25 percent over the same period, resulting in $13,567 more growth as shown in the chart below.

One-Year Treasury

Five-Year Annuity

Calendar Year

Interest Rate

Year-End Balance

Interest Rate

Year-End Balance

2007

5.00%

$105,000

4.25%

$104,250

2008

3.17%

$108,329

4.25%

$108,681

2009

0.40%

$108,762

4.25%

$113,300

2010

0.45%

$109,251

4.25%

$118,115

2011

0.29%

$109,568

4.25%

$123,135

Additional growth

$13,567

Source of Treasury rates: rates on the first day of each calendar year, obtained from Board of Governors of the Federal Reserve System (US), one-Year Treasury Constant Maturity Rate [DGS1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS1. Annuity rate: indicative of a typical five-year guaranteed annuity rate available in January 2007.

 

Position a longer-term approach

Looking at the numbers above, annuities could make sense for many investors. If that’s the case with your clients, here are some key points to consider when providing counsel on annuities.

When to purchase
 Don’t let clients get wrapped up in current or future interest rates, but rather take the opportunity to educate on how those rates are set. Let them know that while government-set interest rates for banks may influence annuity interest rates, that’s the extent of it, so they shouldn’t deter anyone from looking at an annuity.

Your counsel regarding the timing of purchasing an annuity should focus less on interest rates and more on the potential earnings they are missing out on by waiting to purchase, or purchasing a different investment vehicle.

Understanding Risk
Many clients simply want to play it safe with more familiar short-term options like savings accounts and certificates of deposit. However, annuities are similar to these in their safety, and clients willing to make the longer-term commitment that an annuity requires can add an additional layer of protection from risk — such as dramatic fluctuations in interest rates as demonstrated above.

While often overlooked, annuities are a great tool to help grow money, maybe now more than ever. Be prepared, so when the questions come, you’re ready to guide your clients to the growth opportunity an annuity can provide them. ◊

 

 

 

About The Standard
The Standard is a leading provider of financial products and services, including group and individual disability insurance, group life and accidental death and dismemberment insurance, group dental and vision insurance, absence management services, retirement plans products and services, individual annuities and investment advice. For more information on The Standard, visit standard.com.
The Standard is the marketing name for the subsidiaries of StanCorp Financial Group, Inc.: Standard Insurance Company; The Standard Life Insurance Company of New York; Standard Retirement Services, Inc.; StanCorp Equities, Inc.; StanCorp Mortgage Investors, LLC; StanCorp Investment Advisers, Inc.; StanCorp Real Estate, LLC; and Standard Management, Inc.
Endnotes
1. LIMRA Secure Retirement Institute Forecasts Total Annuity Sales to Improve Through 2019, LIMRA, https://www.limra.com/Posts/PR/Industry_Trends_Blog/LIMRA_Secure_Retirement_Institute_Forecasts_Total_Annuity_Sales_to_Improve_Through_2019.aspx, June 15, 2018.

 

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