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Indexed Annuity Benefits & Costs Effected by Mortality Table Changes

Fixed indexed annuities are getting a little more expensive and a little less generous, something that may go unnoticed to the untrained eye. This information comes from Insurance News Net’s article “FIA Terms Tighten Despite Strong Sales,” by Cyril Tuohy. Third quarter fixed indexed annuity sales were $14.3 billion, which was an increase of 22% from the second quarter. Those sales brought the total yearly fixed indexed annuity sales figure up to $38.4 billion. Even though sales are strong, financial advisors researching the details of indexed annuity contracts have found small percentage changes in many different areas that make these annuity products a little less generous than they were. This is because of consistently low interest rates and impending IRS changes to mortality tables.

One income rider offered by a well-known insurance company lowered their 8% simple interest roll-up rate in 2011 down to 7% and then just lowered it again to 6%. A different income rider that had an 8% compound interest rate in 2011 now pays 6.75%. Roll-up rate terms have also been changing. One insurer changed their roll-up rate terms from the earlier of age 85 or 15 years down to 10 years. Most lifetime income payout percentages have stayed the same on the back end, but one insurance company reduced their single and joint life five-year income rider percentages by 1/2-1% recently. Many of these small changes are hidden in annuity contracts and hard to find by an untrained eye. But financial advisors say that these subtle changes are the insurance companies’ way of increasing costs and cutting benefits.

Some people are having a hard time understanding why insurance companies are making these changes even though fixed indexed annuity sales are strong and predicted to remain that way well into the future. Many changes were made during the time that interest rates were decreasing, even though they were just raised for the first time in years. But the most recent changes are based on the impending changes to mortality tables that show Americans are living longer. Since some annuities promise to pay income until the annuitant dies, longer life spans make the products more expensive for insurance companies to sell. One insurance expert says that insurers should have done a better job hedging their risks so that they didn’t have to make these changes now.

More changes are expected with fixed indexed annuity products, including changes to lifetime income benefit rider charges, fees and payout rates. These changes are making some consumers take a closer look at deferred income annuities to see if they are a better fit than fixed indexed annuities. One financial expert recommends doing a detailed comparison between fixed indexed annuities with income riders and deferred income annuities. That is the best way to see which product will meet your needs. Indexed annuity products still remain beneficial to consumers, but increasing income rider charges and lower premium bonuses reduce the accumulation and death benefits of the products.

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