The Next Fixed Annuity Market Shift

For one thing, agents should not view the changes as a deterrent, suggests Fisher. "There are still products around with competitive rates. For instance, Im looking at one right now that is offering 4.5% guaranteed for five years, for deposits of $100,000 or more.

"You have to look for them, but they are there."

Furthermore, although policy count has dropped, many companies already have filed replacements, says Fisher. These should become available in coming months.

Also, remember that fixed annuities–even those with the lower interest rate floors–still have an advantage over bank certificates of deposit, which are now paying 0.5% to 1% interest, says Nadolna of Illinois.

Comparatively, "I can offer a client a three-year CD-type annuity paying 3%," he says. "That will help the person accomplish a short-term goal. And, since many annuity buyers are well into their 50s, many policies will mature after the owners are age 59 1/2, so they can pull the money out or leave it, without penalty."

Another suggestion: To get a higher rate for the client, sell FAs that pay lower commissions, says Fisher, pointing to the commission ranges on Chart I.

Perhaps ladder the money, using, say, one-, three- and five-year CD-type annuities, offers Ernie Boyd, president of Boyd Financial Services, Amarillo, Texas. This way, the client can lock in respectable yields in the five-year product but still keep open the opportunity of investing for higher rates (if they exist) in one or three years, when the shorter-term products mature.

Focus on recommending "simple, straightforward products" with "no rigmarole," recommends Nadolna. In todays market, that translates into selling FAs that pay 2% commissions, not 4% or more, he says.

To get a 4% commission in todays market, Nadolna adds, agents would need to sell FAs with bonus interest rates or other conditions. That is contrary to his goal of simplicity.

Several agents are avoiding trust-me contracts, even if they have a good front-end bonus" and higher commissions. These are traditional FAs with a guaranteed first-year interest rate and renewal rates that are declared annually thereafter, subject to the minimum guarantee.

Boyd no longer offers trust-me plans. The problem with these products, he says, is their renewal rates are unknown, and in recent years they have been lower than new money rates. "People are looking for safety today, not risk," he says.

Furthermore, "I want people to be happy with their purchase years from now, not just in the first year."

Still, if interest rates start to rise, agents might want to consider the more traditional products after all, says Alexander. In particular, he recommends using FAs with portfolio rate financing, not block rate financing. The former is likely to pay a rising credited interest rate as general portfolio rates rise, while the latter locks in particular rates, he explains.

Another strategy from Boyd: Stay open to using different carriers. Some previous carrier partners may have had rating downgrades or other changes that make them less attractive in todays environment, he explains.

Some of the highest FA rates right now are from fraternal societies, and some fraternals will accept business from brokers, adds Alexander.

One suggestion, concerning company ratings, meets with mixed reviews, however. Some producers maintain that conditions are such that agents should at least consider offering products from B+ rated companies as well as companies rated A.

The rates offered by B+ companies tend to be higher than those of A-rated carriers, which boast greater strength, explains Boyd. He says he discusses the differences with clients, but that "most go for the product from the B+ company, because of the rates."

Those who want a high quality company do choose the A-rated company, Boyd adds, and they knowingly take the lower interest rate.

However, Nadolna of Illinois is firmly against using anything but A-rated companies. "Some B or B+ companies may be perfectly solid, and there may be very good reasons for their ratings" that may not pose risk to clients, he allows.

Even so, he thinks defensive caution is the better way to go. "I dont want to be in a situation where someone says, why did you get me into that company?" he explains.

Fisher, the Dallas broker, says he will recommend B+ companies–if he has checked them out and found them suitable. Given the number of rating downgrades in the past year, he adds, "I generally feel much better about using a company whose B+ rating was just reaffirmed than one whose A- rating has not been reaffirmed."

The message for FA agents today, sums up Nadolna, is to be flexible. For instance, "be facile" and "be willing to move from company to company. Do your due diligence. And have a lot of wholesalers, because not all of them "have the same product."

Finally, start thinking of fixed annuities as "an" answer for the client, not "the" answer, he says.

"Dont let the numbers (about declining policies available for sale or average interest rates) govern what you do," adds Fisher. Products are still around that pay better rates than bank CDs, he stresses, and there are plenty of customers who want those products, even if the policies pay less than previously.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 18, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.