Last week I tried to explain to everyone how rate adjustments work within an index annuity contract. It’s an objective matter that offers little insight as to the structure but there is plenty of room allowed for the inquisitive mind to make a rational decision. Even still, there are those who feel as though the matter of interest rate adjustments relies simply on the mood of an insurance executive when renewal time comes. I don’t blame anyone for feeling that way because my suspicions suggested the same years ago and only continued evidence to the contrary allowed me to change my opinion.
Yes, there are contract options that guarantee rates will never drop. There aren’t many but just last week news broke that there are two more available now. Anyone who doesn’t like adjustable rates has an option, although the guaranteed rates likely won’t have as much potential. I expect to see more of this over time.
On the adjustable side, there are many factors at play that I alluded to last week and I received some sharp feedback that questioned my analysis. Since I don’t believe anyone else goes to this depth to explain contracts, I would expect the benefit of the doubt for my efforts. My objective has always been to give everyone as much information as possible so that each person can take control of their financial future for the right reasons. If you don’t like what I say then take someone else’s word and run with that.
The truth is that rates change every year for fundamental reasons, not based on someone’s mood. The price of bond funds changes daily, up or down. The price of stocks and dividends paid change constantly as well. Sure, you can sell a stock or bond at the current price at the moment you decide the terms don’t work. If so, what else would you buy? Maybe a bond that yields less or a stock at a higher price that creates a lower effective dividend?
There are many ways to poke holes in my argument based on bond yields and stock dividends but I’ll just come right back and talk about the volatility associated with either. The biggest reason I’m right is because I’m talking about something that definitely doesn’t fluctuate in value. It only goes up. Although there are several advisors who will take a different approach, this solution is for those people who want justification for taking the path of true stability for some assets.
Last week I heard from someone who decided not to buy a few years ago because he thought rates would drop without notice and the insurance company would work the game against him. I have sold several similar contracts since then so I looked up the illustration from the initial proposal, wondering how much rates have changed since then.
Here are the index options and associated rates from the Great American contract I proposed in September 2017.
When I saw that I realized that those were pretty good rates and that anyone now would be crazy to pass those up. Then I realized that there were a few other people who did in fact buy the same recommendation at that time. I looked up one contract and found something that many might consider to be unbelievable…
The following numbers are from a contract that was issued in October 2017 so the timeline, given IRA transfer times, lines up perfectly with the illustrated rates from above. This from the 2020 renewal letter so these rates are what is available entering the fourth contract year.
Here is objective proof that rates can in fact rise as well as drop, so long as certain economic conditions are met. It is an adjustable rate that works in your favor just as easily as it can work against you. It’s the same contract in both cases, one illustrated just two weeks before the other was issued. My goal for each person was to find a solid growth contract and I think I did a pretty good job.
Many people had the experience of seeing rates decline with an existing contract mostly because benchmark rates have been declining since 1989. It’s only a matter of economics that will work the other way in a rising rate environment. There was a slight increase in rates between 2017 thru 2019 and it affected this contract positively.
This is why I’ve always recommended the adjustable rate contracts. Sure you can have the guaranteed cap and participation rates but you must accept lower potential in exchange for the guarantee. With rates possibly rising in the future I’m going to continue recommending adjustable rates. Most of the time I am just happy to see rates on client contracts that stay steady, but in a few cases I’ve seen them rise, which is even better. It’s a nice thing to know when rates are low and you’re having a hard time making the commitment.
Let me know what you think… comment below or respond to the email if you have anything to add.