When the Federal Reserve raised a benchmark interest rate by a quarter percent in December, key officials tacked on an extra gift by signaling their expectations of still more rate increases to come in 2017.
While it may be too early to crow about happy times, at least the day has finally come for advisors like Jon Luskin to contemplate happier times.
Luskin, a financial planner with Define Financial in San Diego, said he’s looking forward to interest rates creeping back to their historical average.
In the past five years, the 10-year Treasury rate hasn’t risen above 3 percent, well below its long-term average of 6.31 percent.
December’s 25-basis point rate increase came a year after a similar hike in December 2015, which was the Fed’s first rate increase in nearly 10 years.
Higher rates give advisors the chance to contemplate shifting client assets into other life and annuity product classes, said Chad Tope, president of annuities and individual life distribution for Voya Financial.
In the first three quarters of 2016, fixed annuity sales rose 25 percent to $91.5 billion compared with the year-ago period. sales of every fixed annuity category also rose over the comparable periods, data from LIMRA Secure Retirement Institute show.
Sales of a specific fixed annuity depend on product design and client needs. But the adage that a rising rate tide lifts all fixed annuity boats seemed to apply in 2016 and would carry over into 2017 as fixed annuities deliver higher yields than comparable conserving banking sector investments.
Seeking to take advantage of higher rates, Voya Financial will launch a new fixed indexed annuity next month. If rates continue to rise, the fixed annuity marketplace could come back even further as crediting rates rise, Tope said.
Fixed indexed annuities are on track to generate $60 billion in sales in 2016, according to industry data trackers.
Higher Rates’ Thawing Effect
Like the thaw in the wake of a long harsh winter loosening large blocks of frozen ocean, rising rates offer advisors more freedom with regard to laddering clients’ retirement income portfolios. This occurs as advisors find it easier to adjust the components to financial planning.
In a rising rate environment, income from a single premium immediate annuity could offer policyholders better value than withdrawal benefits of a deferred annuity, Tope said.
With universal life insurance products, which are generally more interest-sensitive than whole life products, higher rates will lead to higher cash values. This will help keep the product in force, Tope said.
It also may make sense for advisors to consider policies where policyholders share in an insurer’s profits or dividends through “participating policies,” and benefit from higher account values. That's what actuaries Max and Karen Rudolph wrote in a 2015 research paper published by the Society of Actuaries.
So far, 2017 has produced a Goldilocks scenario with slowly rising interest rates and solid stock market gains fueled by the election of Donald J. Trump. The post-recessionary bull market celebrates its eighth anniversary in March.
One of the big beneficiaries of this new higher-rate cycle is likely to be the online distribution models as insurers and advisors have invested millions of dollars in technology upgrades.
New consumers in the market for life insurance could find their purchasing experience more convenient than they expect.
Also, look for rising rates to boost demand for pension risk transfer market deals as retirement plan sponsors see greater opportunity to move pension liabilities off their books. This is what Stephen Pelletier, executive vice president and chief operating officer of Prudential Financial’s U.S.-based businesses, said in a call with analysts last month.
On the Insurance Company Side
For insurers, higher rates come as a breath of fresh air. These higher rates offer relief from rate compression — low yields from fixed income portfolios reinvested in still lower yielding assets — that insurers have had to deal with since the financial crisis.
Insurers won’t reap the rewards of higher portfolio yields for another two or three years until existing investments come to maturity and proceeds reinvested. However, higher rates will allow insurance products to offer more value to consumers through innovative product design.
In the meantime, advisors should be careful of insurers offering annuities with teaser rates as a quick way to open the new premium spigot, said Mary Pat Campbell, vice president of insurance research with Conning.
She compared rising rates to a firehose of new premiums flooding insurance company coffers only for companies to eventually pull back.
Industry analysts said rising rates could attract new life insurers into the market. Or they could cause insurers to re-enter an insurance line abandoned during an earlier era of falling rates. This generally would be welcome as more insurers in the market usually means more competitive pricing for buyers.
A sudden rise in rates could tempt policyholders to surrender their contracts for new policies with higher crediting rates or bank products offering higher yields. But, so far, surrender activity has been very low on permanent life insurance products, Campbell said.