Annuity Rates Can be Different When Renewal Rates are Declared

10 Sep

Perhaps you are considering investing in a deferred annuity to use later in your retirement as a form of longevity insurance. You may want to look into the annuity company’s annuity rate renewal history to make your choice. Two seemingly identical deferred annuities can offer you the same terms but may produce decidedly different annuity rates at renewal time. Let’s see why.

A deferred annuity comes under jurisdiction of your state’s department of insurance unlike their variable versions. This limits the annuity company’s investment options to support its deferred annuity offers for the assurance that such an insurance product will give. Regulations require most of its investments to be in bonds.

Exploring your potential deferred annuity choices, you may find two companies offering an attractive deferred annuity with the same terms. Each annuity has the same initial annuity rate, the same minimum annuity rate guarantee, the same surrender charge, and lastly the same withdrawal features. But, of course, after the initial annuity rate time has expired, each company will substitute a renewal rate according to its own investment discretion. What determines that?|

The earnings from an annuity company’s portfolio depends on the mix of investments (mostly bonds but also mortgages and real property) on the bonds’ quality and average maturity. Both of these relate to risk and therefore affect their yield. More risk generally means higher yield and a higher annuity rate for the investor. 

The higher the quality of the annuity company portfolio, the less is the risk of default. Lower risk bonds offer comparatively lower interest rates. Time itself carries risk. Bonds with a longer time to maturity generally offer higher yields than short maturity bonds.

Companies that fund portfolios of higher risk receive higher yields and hope they do not suffer the risk consequences involved. They can afford to pay higher overhead expenses, offer higher annuity rates to their customers, or take larger profits for themselves. It’s their choice, albeit at a higher risk to their annuity policy holders.

As an example, let’s see the affect of bond portfolios with different average maturities held by two companies which offer the same deferred annuity. We will hypothetically assume they both are yielding 6% and other things are equal. 

 

Company A

Company B

Average Bond Maturity

15 yrs

8 yrs

Current yield

6%

6%

Renewal rate under rising prevailing rates

Selling would  cause loss of fund’s value – offer 6% again

Almost matured –must buy and offer higher rate

Renewal rate under falling prevailing rates

No need to sell , offer 6% again

Almost matured – must buy and offer lower rate 

 

 

The table above shows that Company A with the longer maturity is trapped under rising interest rates to offering the 6% annuity rate renewal; but under falling interest rates it can happily maintain the 6% annuity rate.  The short maturity Company B must buy to replenish its portfolio. But it necessarily has to offer whatever the prevailing rate moves to … for better or for worse.|

It’s possible that some companies may offer a high ‘teaser’ initial annuity rate, only to make any associated losses up with decidedly lower renewal rates.  A quick review of renewal rate history may help you decide which company will give you the biggest overall return for your investment.

The post provided by Javelin Marketing

Leave a Reply

Your email address will not be published. Required fields are marked *