What If Interest Rates Keep Falling?
By Linda Koco
NEW YORK CITY – A falling interest rate environment will spur some customers to look for opportunities for upside potential, and that can affect the products and strategies that agents and companies take, according to Timothy C. Pfeifer, president of Pfeifer Advisory.
The Libertyville, Ill., product expert spoke with InsuranceNewsNet about the impact on agents in advance of an early bird workshop he is leading today at the LIMRA annual meeting. His workshop presentation spotlights strategies that companies can make in a falling interest rate environment as well as what consumers and agents can do.
In the next 12 to 18 months, if interest rates stay low or continue to fall, consumers, agents and insurers will use a variety of strategies to adjust, Pfeifer says.
Some customers will start shopping for products that show upside potential, he says. In view of that, agents might want to be prepared to show clients products such as indexed annuities or indexed life insurance, since these have both downside guarantees and upside
In addition, agents will want to be sure to emphasize to clients that “diversification is still as prudent as ever,” he says. “In any economic environment, customers need to keep their platforms diversified so they can take of advantage of the unpredictable financial swings when they occur, whether in real estate, stock market, interest or other areas.”
This will also be a good time for agents to remind customers that tax deferral continues to be a “quite valuable” policy feature. In a low-interest environment, some customers might underestimate the extent of that value, Pfeifer allows, so producers will need to provide education — or re-education — on that point.
A low-interest-rate environment will likely forge a “be smart” approach to insurance and financial decisions, too. For instance, Pfeifer says, “look for clues as to rising or falling rates, such as unemployment.” The customer can use those clues in considering, with their advisor’s guidance, not only whether to make new purchases but also whether the time is right to make withdrawals, do 1035 exchanges, or turn on income benefits.
Possible Carrier Actions
Industry professionals will also need to keep tabs on how annuity and life carriers are responding to the interest rate environment, Pfeifer says. If the carriers change products or approaches, that may change the options available to consumers and their advisor.
For example, in the fixed annuity market, some carriers might respond to falling interest rates by eliminating the return of principal guarantees in their products, Pfeifer says.
Pulling those guarantees would enable the carriers to continue to offer their products as opposed to withdrawing them altogether until interest rates to start rise again, Pfeifer says. It would also enable them to credit a higher interest rate than they would otherwise be able to do — and that would be a competitive advantage for product buyers and sellers.
Alternatively, Pfeifer says, some fixed annuity carriers might add more powerful market value adjustment (MVA) provisions to their contracts, or add more guaranteed lifetime withdrawal (GLWB) benefit features. “The MVA will enable the carriers to credit a higher rate, and the GLWB will enable them to offers a very compelling story for customers who know they are planning to take income from their annuity,” he says.
Where indexed annuities are concerned, in a low-interest environment, expect to see continued carrier focus on income sales, says Pfeifer. This will underscore the importance of buying annuities for retirement purposes and, in the process, help attract agents and customers who are looking for long-term financial solutions.
Some carriers in the indexed annuity market might sweeten the death benefits in their products, too, he says. This would add an additional layer of protection for the beneficiaries who survive the death of the annuitant.
As for life insurance, Pfeifer is predicting that carriers will put increased focus on offering indexed products — ones with attractive caps on the participation rate.
Finally, some life insurers might start offering products with ancillary benefits such as long term care coverage and death benefit acceleration in event of long-term care confinement. This strategy is not a direct response to a life policy’s low interest rates, he allows, but he says “it does give the advisor something else to talk about with the client—and these other benefits are things that many clients will want to hear about.”
Pfeifer will address many other aspects to managing in a low interest rate environment during his workshop session at 4 p.m. today. Another early bird session is also available at 4 p.m.; led by LIMRA’s Todd Silverhart, Ph.D., it will spotlight the latest LIMRA research on how consumers view insurance products and services.
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