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Impact of Low Rates and Market Volatility on Annuities

Today, about 50 Million Americans are retired – left the workforce to rely on their assets, social security, and pensions to maintain a comfortable lifestyle in retirement.  2020 is proving to be a year to test that word comfortable.

For many, annuities are a great tool to plan for retirement.  After a lifetime of work and of seeing the market rise and fall, the words “Guarantee” and “Income Stream” can resonate with many people at or near the finish line.  However, today’s market volatility and, more importantly, many insurance companies’ responses to that volatility, gives reason to further examine your existing annuity contracts and gives a new light to new annuity purchases.  I would like to highlight some of the issues we are finding in the annuity marketplace during such unprecedented uncertainty, low interest rates, and market disruption.

Low Rates Strike Again

Historically low interest rates are impacting existing and new issue annuities.  This environment generally causes insurers to increase the cost they are able to increase to the maximum levels, while also decreasing benefits where they can, to maintain ratings, solvency, and the obligations of their guarantees.

In 2012, Bloomberg news noted that “slumping interest rates…have wreaked havoc on…annuity businesses, boosting the cost of hedging variable annuities with living benefits” which in turn, led to a significant reduction in guaranteed income benefits, and an increase of cost in those benefits.  Low interest rates affect products instantly, as insurers are making less in the margins, with some opting to refrain from new sales and leaving market segments altogether.   As interest rates having fallen even lower in 2020, and the conversation of potential negative interest rates still persists, this may have a similar impact to annuities today.

Opportunities In Chaos

While Bloomberg was right in their assessment of changing annuity costs and benefits, they missed the mark in the title of the article which read, “Fed’s low interest rates could lower interest in annuities”.  That couldn’t have been further from the truth, as annuity sales continued to climb, especially in the Variable and Indexed annuities that often promote these “Income Riders” and “Roll-ups” that just had cost increases and benefit reductions!

It is often times like these when people get sick and tired of the stock market’s uncertainty, so I would not be surprised to see annuity conversations happening more frequently in the days ahead.  Just because the cost of something goes up, or the perceived benefit of something goes down, does not necessarily mean its demand will suffer.  Insurers have a way of designing new products and offering to appeal to the current marketplace, and we dedicate a lot of resources to knowing and understanding the current opportunities in annuities.

Know the Bail-Out Provisions on Fixed Income Annuities

Fixed income annuities offer a fixed crediting rate for a fixed period of time. An issue we are now facing is that of the Bail-out Provisions of these annuities.  Bail-out provisions offer a small time window, often at the end of a multi-year guaranteed period, to remove your money from the annuity with no surrender charges. If you don’t take it out during the bail-out window, your annuity may renew at the contracted minimum rate, which may be much less than you were previously being credited, and possibly be subject to surrender charges.

Given the state of low renewal rates, it is a good time to review the dates and bail-out provisions of your fixed annuity.

Non-Guaranteed Elements of Existing Annuities Will Change

If you have annuities with income riders, they may be more valuable now than they ever will be in the future, as the cost of the rider may make the policy struggle to get its account value back to where it was at recent market highs.

If you have a Fixed Indexed Annuity, you may find that your insurer may reduce the index crediting rates to their minimum guaranteed levels.

While many annuity benefits are guaranteed, their costs often are not.  Insurers are increasing rider costs while policy values may be at their all-time lows, which may have a meaningful impact on the outlook of the annuity and its role in your financial plan.

Take action!

At Symphonic Financial Advisors, we focus on building plans, portfolios, and strategies that weather times of uncertainty and are flexible given different outcomes, like the changes in interest rates, inflationary assumptions, and many other geopolitical and economic variables.  Now is a good time to review existing annuities to do a cost-benefit analysis of using the annuity as purely an income tool vs. moving it elsewhere.  If you have not testing each of your strategies for their worst case scenario and accepted the impact on your comprehensive plan, let us do it for you!  And let’s do it now!

Joe Calhoun, CFP®

Joe Calhoun is the Director of Financial Planning for Symphonic Financial Advisors, guiding our Financial Advisors in delivering custom-tailored planning services for clients.

DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.