How Much is that Annuity in the Window?

I’m sure you have seen all the promotional emails lately about products from a variety of our annuity carriers.  A special limited time offer for a 30% premium bonus with Allianz; a 54% participation rate on the straight S&P 500 with American Equity; and other top carriers with annual point-to-point caps over 5%.  All of these rates are great and can be very enticing for clients and prospects alike; however, we must understand where these rates come from.  How are they priced?  If we understand that then we can have a better idea of how and when prices will move again.

The first, and most simple, indicator is the 10-year Treasury rate.  The higher it is the higher rates SHOULD go.  But it is just one of a few variables considered when the actuaries determine how to price a product.  As of September 5, 2018, it was at 3.05% and for the last six months it has been hovering around 3%.  This is good news.  The 10-year rate has not been above 3% since 2011.  So things are looking up, right?  Well, let’s look at some of the other factors.

The second factor in determining pricing of rates on indexed annuities is market volatility.  The 10-year rate is important to pricing because it indicates, in very general terms, what the annuity company can earn on a bulk of their investments; in most cases, high grade bonds.  However, they also use options, and other similar products, to hedge their investments and earn interest.  One thing we know about options is that, generally speaking, as volatility increases, the price of options will fluctuate as well.  Now, I know that it is a lot more complicated than that.  See the chart below to see how the price of options will change with the rise and fall of the S&P 500 and the VIX.  We do know, again generally, that the VIX (measuring implied volatility, which is represented by the “IV” on the chart below) moves inversely of the S&P 500.

Price-Volatility Dynamic
Price-Volatility Dynamic
Positions Rise in S&P 500/Fall in IV Rise in S&P 500/Rise in IV
Long Calls +/- -/+
Long Puts
-/- +/+
Short Calls -/+ +/-
Short Puts
+/+ -/-

As options get more expensive, so do the price of annuities, meaning rates, payout rates, bonuses, etc. will decrease.  Something has got to give.  As a friend of mine in the industry told me when I first got started: “Every annuity is made of $1 and there are always only 100 pennies in a dollar.”

RELATED ARTICLE: Time in vs. Timing

You can form your own opinion about what the market will do in the near future or where rates will move in the next year, but a number of analysts that I have read are saying that with Republicans controlling Congress, we should see a couple more increases in the Fed rate before the end of the year.  That will make it more expensive to get cash to do business and that can bring the market down.

Regardless of where you think the Fed rate is going and what direction the market will move in the near future, now is the time to purchase an indexed annuity.  The market is high and you can lock in a portion of your clients’ gains with the contractual guarantee of an indexed annuity, which may help protect some of their savings if the market declines in the future.  Credited interest rates, participation rates, and payouts are also near the highest they have been in the last decade.

Annuity Sales Idea:

If you have clients who are wanting to “lock-in” their gains but are also worried about missing out on potential extra gains in the market, use an FIA for potential accumulation that allows for flexible premium.  You move some now and some periodically as the market moves one way or another.  Call Tarkenton Financial today to run a case by our marketers using this strategy.

Thanks for reading,

Dustin Casebolt