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Upside of Low Interest Rates


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Indexed annuities have been getting a lot of attention lately, thanks in part to the fact that their optional living benefit riders are a bit more generous than similar riders on variable annuities.

They’ve also taken a welcome step that could lead to greater price transparency, indexed annuity expert Jack Marrion of AdvantageCompendium.com recently explained to me.

The low interest rate environment, ironically, seems to be responsible for this positive effect, he said. As I understand it, prevailing rates are so low that sellers of indexed annuities no longer have the option of supporting the cost of certain standard product features by reducing the interest rate that is credited to the annuity when the rate comes up for annual renewal, starting in the contract’s second year.

To cope with this squeeze, a few issuers of indexed annuities are beginning to explore “unbundling” the product. In other words, they’re starting to let the customers decide which options they want to pay for and which ones they don’t. Think of it as the start of a shift from “prix fixe” to “a la carte.”

While this subtle change in product delivery doesn’t solve the low-yield problem (which Federal Reserve chairman Ben Bernanke promises could last until 2014), it “may one day lead to greater transparency” regarding the component costs of indexed annuity contracts, Marrion says.

Written by Kerry Pechter

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