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Longevity Insurance Gets a Makeover with Deferred Income Annuities

Are fixed annuity rates heading up along with the uptick in interest rates on five- and 10-year Treasury bonds? Why, yes they are. At least a bit at some carriers.

This could start giving certain annuities a boost in competitive attractiveness, bringing a little steam into the sales environment for annuity agents, distributors and carriers. That hasn’t happened yet, but the ducks are lining up.

Consider the Rates

Interest rates for five-year CD-type deferred annuities in the AnnuityNexus database at Beacon Research averaged 1.36 percent in the month of December, according to Judith Alexander, director of sales and marketing at Beacon.

By June, the average for the same products had crept up to 1.49 percent – 10 percent higher than in December.

And on July 15, the daily average for the five-year products was 1.74 percent.

Beacon uses the five-year CD-type annuities for benchmarking purposes when evaluating rate trends in fixed deferred annuities, because these are popular products in this market. The averages shown take into account not only the base credited interest rates being offered but also any bonuses, Alexander said.

An upward-bound trend is evident in the income annuity world, too, although the measurement is in payouts offered by the products instead of interest rates credited.

Take a look at the payouts for a $100,000 single premium immediate annuity (SPIA) written on a 65-year-old man purchasing a single-life lifetime annuity with a 10-year certain period. That is a typical sale in today’s market, said Gary Baker, president of CANNEX (U.S. Division). The company’s U.S. Income Annuity Exchange database shows products from at least 15 top income annuity carriers.

Over the first six and one-half months of this year, the average payout offered on such a SPIA increased by nearly 7.5 percent for the top 10 players, Baker said.

If that man had bought his $100,000 SPIA on Jan. 1, he would have started receiving a monthly income of about $506. But if he waited until July 16 to make his purchase, his monthly payout would be $544, or $38 more.

There are outliers in the numbers because a few carriers have moved their payouts noticeably higher than most and a few have made relatively little change. Still, when looking at, say, the top five carriers, the payouts are decidedly up. Baker attributed much of the upward trend to the general interest rate environment.

Getting Attention

To people who are hungry for rate, these trends may seem like much ado about nothing. After all, the crediting rates in deferred annuities are still minuscule compared to bygone years when rates were in the 5-6 percent range (and even into the double-digits decades ago). Likewise, some may downplay the monthly payout increases in income annuities as not creating a “meaningful” bump-up in terms of pure dollars.

Average Monthly Five-Year CD-Type Annuity Rate January 2011-July 2013

But when compared to the downward slide of the past few years and the long low interest rate plateau of much of 2012, the up arrows are getting attention.

For instance, in mid-July, “there were three five-year CD-type annuities in the AnnuityNexus database that were crediting over 3 percent,” Alexander said. “In addition, nine products in the 10-year CD-type annuity category were also crediting over 3 percent.”  (Ten-year CD-type fixed deferred annuities are not a hot-ticket item today, but some carriers do offer them.)

At least one carrier is offering a rate as high as 3.6 percent right now, Alexander said.

As indicated previously, the averages for the five-year CD-type annuity that Beacon tracks are below 3 percent. However, the fact that some products are offering more than 3 percent suggests that some carriers want to attract sales in today’s market, she indicated.

The Comeback of the ‘Annuity Advantage’

In the fixed deferred annuity market, this rising rate environment could stimulate the return of the “annuity advantage,” Alexander said.

Annuity advantage is an industry term. It means that annuity rates have reached the level where they are nicely above what bank certificates of deposit and Treasury bills are paying, making the annuity purchase comparatively advantageous for the customer.

One common benchmark for that sweet spot is when there is a 200 basis point spread between fixed annuity rates and CD rates (or Treasuries). The 200-point spread was a rule of thumb that agents and advisors used when talking with customers during the mid-2000s (and many other eras). It went south during and after the recession of 2008-2009 when crediting rates dropped to the product floors.

When interest rates are at 2.5 percent or higher, however, the annuity advantage starts to become a real possibility again, Alexander said.

Right now, a 200-point spread would probably be too high to expect, she said. But there is more advantage now than there was at the beginning of the year.

The Income Annuity Advantage

In the income annuity market, agents and advisors tend to talk with clients in terms of how the annuity payouts compare to the amount that a systematic withdrawal program from a bond, bank or brokerage account might generate, Baker pointed out.

When that is the case, the income annuity has its own advantage. That’s because the payouts track not only with changes in the interest rate environment but also with the “mortality pool” managed by the issuing carriers, he said. The combination is what creates the advantage.

Take the case of the 65-year-old man cited earlier in this article. The agent likely will take the monthly payout, annualize the amount and compare that to, say, a systematic withdrawal from an investment portfolio. In today’s market, the cash flow from an SPIA will tend to average close to 6.5 percent a year, or even higher at the older issue ages, Baker said.

To make the point, the agent then can determine the risk the client would experience by withdrawing assets at the same rate from an investment portfolio that has no lifetime guarantee. Client needs and other factors will influence the client’s decision, but the income comparison will play its part.

It’s worth noting that even carriers that are paying the lowest monthly income right now are still paying more, on average, than they did six months ago.

For instance, if the man cited in this article had purchased his SPIA on Jan. 1, he would have received, from the carriers offering the lowest payouts, somewhere about $454 a month (or a cash flow of 5.4 percent). But if he made his purchase on July 17, he might have received about 5.7 percent more, or $480 a month, according to averages from CANNEX.

If factoring in all SPIAs in the CANNEX USA database, including the outliers (the highest and lowest payers), the average payout for that man would have increased by 6.8 percent if he purchased on July 17 versus Jan. 1. He would have received $521.86 a month instead of $488.50 a month.

The Trend in Treasuries

As a point of comparison for interest rate buffs, the five-year Treasury yield – often considered an indicator for fixed deferred annuity trends – was, on July 17, in the neighborhood of 1.3 percent. Twelve months earlier, the five-year yield closed at a hair over 0.6 percent.

This means that the yield on five-year Treasuries increased by an eye-popping 122 percent over the 12-month period.

The 10-year Treasury yields on July 17 were close to 2.5 percent. Twelve months earlier, they were 1.47 percent. So, for the 12-month period, 10-year Treasuries increased by nearly 69 percent.

The 30-year Treasury yield – often considered an indicator for SPIA payout trends – was nearly 3.6 percent on July 16. That’s up by more than 38 percent from the 12 months earlier, when the 30-year closed at nearly 2.6 percent.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected] [email protected].

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