With Short-Term Rates Down, Fixed Annuity Sales Soar
May 19, 2008
WASHINGTON -- Higher interest payments, a volatile stock market, and the ability to defer taxes are bringing fixed annuities back into style, the American Banker reported.
For instance, fixed deferred annuities were not even on Kristy Kemnic's radar when the yield curve was flat. But about three months ago the bank rep in Byron, Michigan started getting lots of client requests for the interest-bearing contracts.
"With the spread growing between short and long rates, fixed annuities now look attractive to conservative investors who have been keeping their money in CDs and money market funds," said Kemnic, senior vice president of investment and insurance services at Byron Bank, a unit of O.A.K. Financial Corp.
"Starting last December every bank I've talked to says fixed annuities have been going through the roof," said Kenneth Kehrer, principal at the Princeton, N.J., consulting firm Kehrer-Limra.
The interest rate offered by annuities reflects what insurance companies can earn from investing in five- to 10-year bonds, he said, so as the spread between those bond rates and short-term interest rates grows, annuities look better and better compared with CDs.
At one point 40% of their sales came from banks, Mr. Kehrer said, but today that percentage is in the high 20s.
Lynne Ford, director of the retail retirement group at Wachovia Corp., said that for 18 months, "we had this lingering flat yield-curve environment, which was not good for annuities."
In that environment, conservative investors could get the same or better rates on short-term CDs without having to pay annuity fees or lock up their money for years, Ms. Ford said. "But since the start of the year that curve has been steepening, which is good for annuities."
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