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The days of banks simply offering bank customers 30-, 60-, 90- and 180-day certificates of deposit (CDs) and one-, three- and five-year CDs are long gone.
Banks now offer a plethora of insurance products through a variety of distributions.
While the insurance products sold in the bank branches are typically fixed deferred annuities and simplified term products, bank customers are also being referred to bank-associated insurance producers and financial planners selling a variety of wealth accumulation products. These products include mutual funds, variable annuities, variable universal life and long term care policies.
A few of these products–such as fixed deferred annuities and universal life policies–are undergoing regulatory changes. Other products, like single premium immediate annuities, have benefited from increased marketing efforts. The nature of these changes and how they may impact bank sales of fixed annuities, UL and immediate annuities, is the topic here.
To start, fixed deferred annuities remain a mainstay insurance product sold within banks. Their simplicity and their ability to be designed in a way similar to five-year CDs has much to do with this. Another factor favoring sale of fixed annuities in banks is the difficult time that variable products are encountering in banks, especially since the downturn in equity markets.
However, fixed annuities have had some challenges in recent times. Falling interest rates are now making it difficult for insurance companies to support the 3% guaranteed crediting rate offered by many older fixed annuities.
But help is on the way. This is the form of the revised Model Standard Nonforfeiture Law for Individual Deferred Annuities. In March 2003, the National Association of Commissioners approved the revised model. The revision sets the minimum nonforfeiture interest rate in relation to the five-year Constant Maturity Treasury Rate (CMT).
Under the model, the rate can be based either on a single CMT value or on an average of values, and it can either be set for the life of the policy or reset at times specified in the policy. Thus, different insurers or different products from the same insurer may have different nonforfeiture guarantees. The minimum nonforfeiture rate would not exceed 3% or fall below 1%. The current minimum nonforfeiture rate is set at 3%.
This revised law already has been enacted in three states and passage is imminent in a few others. However, it will probably take a year or more before it becomes effective in enough states to serve as the foundation for a countrywide product.
Immediate relief is available, however, because 29 states have already implemented interim legislation (and two more did not require it). This legislation reduces the minimum nonforfeiture rate to 1.5% for policies issued before a date (between July 1, 2004 and July 1, 2005, depending on state of issue).
These changes should help insurers continue selling CD-type and other fixed annuities in the bank market, despite the low interest rate environment.
