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If you want to know the current dividend the owners for any stock listed on the New York Stock Exchange, all you need to do is open a city newspaper. If you want to know what a person is earning this year on a one-year bank certificate of deposit purchased last year, take a peek at the sign in a bank lobby. And, if you want to know what return a mutual fund owner earned in the last 12 months, all you need to do is go on the Internet.
But if you want to know what interest rate a typical fixed annuity is renewing at, it is not that simple. Different fixed annuities will have different renewal rates because their costs and pricing are different.
Everything else being equal, annuities with an initial bonus should have lower renewal rates than ones without, because the cost of the bonus comes out of available funds. For the same reason, a 5% commission annuity should have higher renewal rates than a similar 10% commission product.
A factor of increasing importance on future renewals rates is the level of the minimum guaranteebecause older, higher guarantees should have greater impact on renewal rates than lower, newer ones. Finally, different product featuresparsimoniousness of free withdrawal features, nursing home waivers and death benefit variationsall affect product pricing and renewal calculations.
Trumping all of these hard dollar renewal rate considerations, though, is the carriers renewal philosophy.
There are two approaches usually proffered when carriers are asked about their renewal strategy. One is where all ratesboth new money and renewal ratesare based on the earnings of the carriers general portfolio and are the same; this method is often called a "portfolio rate."
The other approachcalled "banded" or "new money-old money"entails banding or segmenting together groups of annuities inside the general portfolio based on time of purchase. In this approach, the "old money" blocks of annuities renew at a different rate than "new money" blocks.
Based on the phone calls I receive from producers, the overwhelming assumption in the field is that carriers use a portfolio approach. Producers tell me they like the portfolio approach because if renewal rates are lower than anticipated, the new buyers will not be treated any better (in terms of rates) than existing ones. However, the renewal reality is often different than assumed.
Consider: I asked 35 index annuity carriers which renewal philosophy they basically followed. Of the two-thirds that responded, only 2 say they use what most would regard as a true portfolio approach on their indexed annuities. Everyone else says they use an approach in which old money is treated differently than new money.
