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Slowly Increasing Interest Rates Good for Fixed Annuities


Interest rates are important for the bond market as well as the fixed annuity market.  But just as important as what the interest rate value actually is, is what direction it is headed at what speed.  “Bond market fears igniting interest in fixed annuities,” by Darla Mercado of Investment News, looks at why fixed annuities are seeing a little boost as fear about the bond market has crept in.  This summer has seen a large sell-off of bonds because people are worried that the Federal Reserve won’t be purchasing as many bonds or keeping interest rates low.  The bond sales have helped to increase interest rates almost a full percentage since May.  Short-term interest rate increases are good for fixed annuity products and have led to an increased interest the past few months.

Huge jumps in interest rates aren’t good for bond pricing or fixed annuities, but a gradual increase has been good for fixed annuities.  Insurance companies have to worry about bond pricing and low interest rates just like the bond industry, but this gradual increase allows insurers to be more generous with their fixed annuities.  If rates make a big jump though, other products may seem like better alternatives than the fixed annuities though.  Fixed annuity sales were low in the first and second quarter of the year, with the exception of fixed equity indexed annuities.  But almost concurrently with bond market troubles, many insurers started seeing an increase in fixed annuity sales this summer.  From June to July, Raymond James Financial Inc. saw an increase of more than $12 million in indexed annuity sales and $10 million in traditional fixed annuity sales.  Their immediate and deferred income annuity sales also increased because of the 1% interest rate increase.

Fixed annuities have their tricky parts as well because people always want to buy them at the perfect time.  If you have a fixed annuity with interest crediting, some rates stay the same over the life of the annuity while others adjust after the first year.  The second type is great if rates go up, but not as great if they go down.  The first type makes purchasers happy if rates stay the same or decrease over the life of their annuity.  Since interest rates seem to be on a steady rise, buying a fixed annuity that is either laddered or has adjusted crediting after the first year might be right for you.  The thing with a fixed annuity though is that you are getting your income stream guaranteed and you are paying for the insurance that your money will be there, regardless of interest rates and market declines.  Ask an expert about fixed annuities if you want to take advantage of the slight increase in interest rates now, especially if you are worried about the bond market.

Written by Rachel Summit

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