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!