Traditional fixed annuities (FAs) and multi-year guaranteed annuities (MYGAs) might seem like yesteryear’s afterthought, shivering as their sales are in the shadow of the soaring fixed index annuity (FIA) sales. But it might be a mistake for annuity professionals to give these products the cold shoulder.
Agreed, the industry doesn’t hear much about sales of FAs and MYGAs right now, and innovation in those lines is basically at a standstill. Some annuity newcomers may even be a little fuzzy about what the products are. The FA typically guarantees its interest rate for one-year, and the MYGA for several years; the FA can use a flex- or single-premium design, while the MYGA is single-premium.
But annuity experts will recall that both types of products saw brisk sales when credited interest rates were higher. The eye-catching rates plus the simple design of those products were attractive to many consumers, annuity analyst Sheryl Moore said in an interview. Moore is president and CEO of Wink Inc. and Moore Market Intelligence.
But the prolonged low interest rate environment of the past couple of years put the brakes on some of those sales. Consumers probably still liked the simple designs and the presence of guarantees but they didn’t like the low rates. Comparatively speaking, the FIA’s downside guarantee and upside potential has had a lot more appeal in a low rate environment than the FAs and MYGAs.
This doesn’t mean FAs and MYGAs no longer have a purpose or a future in the industry, however. When interest rates rise, so might the sales of these two fixed annuity lines — “eventually,” Moore said.
Not incidentally, just this month, Wink started publishing quarterly sales and market reports for none other than those now-slow-selling product lines, the FAs and MYGAs.
That may come as a surprise, since Wink reports historically have focused on the kingpin fixed sellers — the FIAs and their indexed universal life (IUL) counterparts.
Might this rollout be a signal that Wink is expecting FA and MYGA sales to start climbing in the rising rate environment that so many are predicting to start this year? Yes and no.
On the ‘no’ side
So far, FIA sales have continued to dwarf sales of the other two annuity lines, according to the Wink data. In the second quarter of 2015, for instance, FIAs sold nearly $12.4 billion, whereas FAs sold roughly $3.7 billion and MYGAs about $4.2 billion.
The FIA sales dominance is likely to continue for quite a while, even if rates start to inch up, Moore said.
“One reason is that FIAs have extra features that FAs and MYGAs do not have,” she said. These include income riders, the ability to link interest crediting to a variety of financial indexes, and the basic tenet of offering upside potential with downside protection.
Also, the banks and wirehouses now represent 30 percent of FIA sales. These channels are offering the FIA to clients who are interested in “its potential to generate returns that outpace what banks can pay on savings accounts and certificates of deposit,” Moore said.
As long at these newer channels, as well as the more established FIA channels — especially the independent agents — continue on the FIA sales path, those sales will continue to be strong even after rates start rising, Moore predicted. Distribution channels do impact sales trends, she added.
There is another reason for the “no” answer. Moore said her firm has rolled out the new FA and MYGA reports because this is part of her firm’s long-range plan. It’s not because she expects interest rates to go up, she said. It’s about “deliberate growth.”
“We want to keep developing and expanding our market,” she said, and the expansion into FA and MYGA data was next on the list. In a few years, the firm plans to publish sales reports on term life, whole life and traditional universal life insurance, too, she said.
On the ‘yes’ side
Still, if a rising interest rate environment emerges and then persists, FAs and MYGAs likely will begin to regain their sales appeal. MYGAs in particular will look increasingly attractive, Moore said.
“The MYGA is all about rate,” she emphsized.
Sooner or later, the distribution channels and their customers will start paying attention to those higher rates and some clients will want to lock them in via the MYGA.
FIAs could still outsell the MYGAs, she added. But if carriers start to innovate on MYGAs - such as by offering new features such as income riders - that could generate more MYGA sales. MYGAs with new innovative features would have competitive appeal because they would still guarantee the higher rates over several years and in a relatively simple product, she suggested.
Some banks and broker/dealers may steer away from such products if they perceive the innovations as adding complexity, Moore allowed. But there are a lot of other factors that would influence what happens, too.
As for FAs’ prospects in a rising rate environment, these policies also will gain some appeal from being able to offer higher rates.
But in general, Moore said, the MYGAs in a rising rate environment will attract clients who want guarantees. “These are people who want to know what they will get every year. They are looking to be comfortable. They will likely include older people trying to arrange their retirement income.”
Advisors don’t always focus on guarantees, but not every client wants to buy products that offer upside with no guarantees, she added. In a rising rate environment, advisors will need to keep that in mind.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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