Will Variable Rate Annuities Shake Up the Market?


Here’s a dilemma that many annuity investors haven’t faced in many years: As rates rise, the price of their fixed annuity investments goes down. Who wants to buy their old annuities if the new annuities coming onto the market earn more interest?

Good question, and one to which Security Benefit Life in Topeka, Kan., Has endeavored to answer.

The company’s solution is the variable rate annuity, a fixed annuity that credits an additional fraction of a percentage based on the London Interbank Offered Rate, or LIBOR, in addition to the base rate for the guarantee period.

The new annuity, marketed as RateTrack, offers a five-year guarantee period option that gives a base rate of 2% and another 0.63% based on the three-month LIBOR rate. Total interest rate credited the first year: 2.63%.

The company’s seven-year guarantee period option credits investors 2.4% and 0.63% on a LIBOR basis for a credited rate of 3.03% in the first year, according to the Security website. Benefit.

If US interest rates rise, LIBOR will also rise since the interbank rate generally follows the federal funds benchmark rate. If rates fall, LIBOR will also fall.

The LIBOR component is adjusted up or down annually and the total credit interest rate is adjusted annually on the anniversary of the contract.

For investors keen on fixed income products, this is an improvement over many fixed annuities that offer 2%, and it is much better than a bank certificate of deposit or money market instrument.

Experts in favor of the variable rate product

Jon Legan, illustration analyst for Annuity Rate Watch, an independent annuity database company outside of Boston, said RateTrack represents a “whole new category” of fixed annuity, not just a new index intended to monitor volatility on an indexed annuity product.

RateTrack’s simple, clean design and the product’s reasonably generous interest rate floor offer encouraging signs that new products can be more streamlined and transparent.

“It’s so much clearer to the consumer what they’re getting and what they can expect later,” Legan said in an interview Thursday with InsuranceNewsNet.

But will this particular type of fixed annuity, launched on March 21, appeal to consumers in a world where sales of fixed annuities increased by 7% last year compared to 2014, mainly thanks to indexed fixed annuities ( FIA)?

“I think the product will work well,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, annuity data tracking services in Pleasant Hill, Iowa. “I also think that other insurance companies will copy the design of Security Benefit Life.

RateTrack offers a relatively competitive credit rate, she said, “without the risks of booking for a typical MYGA (Multi-Year Guaranteed Annuity). In addition, it helps Security Benefit Life to guard against disintermediation, once interest rates rise.

“It will be interesting to see which insurance company is the first to join SBL in this new quasi-MYGA dance,” she added.

Sold through multiple channels

Doug Wolff, president of Security Benefit Life, said RateTrack will be attractive to banks and financial institutions that sell fixed annuities and CDs to predominantly conservative customers. Representatives of independent advisers should also find some appeal for the variable rate annuity.

Comments from advisers indicated that many annuity investors were reluctant to invest in annuities now if interest rates were about to rise in the near future.

“When savers and consumers are nervous, they sit on the sidelines waiting for rates to rise, but they have suffered,” Wolff said.

With average national yields on CDs of around 0.27% and money market funds at 0.11%, savings can be liquid but they also lose value even with low inflation.

Security Benefit believes that now is the time to launch a variable rate annuity as the long period of bullish fixed income comes to an end, interest rates remain historically low and the stock market is volatile, Wolff said.

Bond investors wishing to stretch their yield a little further will be rewarded with the LIBOR “float”.

The LIBOR component, in effect a floating index, provides RateTrack annuitants with hedge against lower account values ​​dictated by rising interest rates. In theory, the variable rate instrument means no loss in the annuity’s market value, because a potential buyer will want to pay the full market value of the investment, Wolff said.

But what happens when LIBOR rates deviate from the federal funds benchmark rate, as they did between the second half of 2008 and the end of 2009?

LIBOR rose briefly as the federal funds rate fell. LIBOR eventually fell back to follow the federal funds rate, but either way, a floating rate annuity investor would have benefited because LIBOR rates were higher before falling to follow the benchmark.

Unlike popular AIFs which link interest credited to looking back on an index’s performance in the past, RateTrack is tied to current rate movements. This is why Legan considers the Security Benefit Life variable rate annuity to be a true hybrid annuity.

It incorporates elements of traditional fixed annuities while paying “homage” to AIFs by offering annuitants a “benefit” indexed to LIBOR.

Cyril Tuohy, Editor-in-Chief of InsuranceNewsNet has been covering the financial services industry for over 15 years. Cyril can be contacted at [email protected].

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