Product Rating Agency Part 3 -


The dreaded topic of renewal rates—a thorn in my side since my egg hatched—may be the most important aspect of fixed-index annuities, but it’s an enigma to just about every annuity purchaser. And most agents probably don’t understand the inner workings of renewal rates either.

Let’s start with the definition of renewal rates: When you purchase a fixed or fixed-index annuity, you are given a guarantee for a certain duration. It may be for one, three or five years, or any period of time that a company offers. Renewal rates commence after your initial guarantee has ended. In the old days, insurers commonly offered new buyers a one-year guarantee that had seven years of surrender penalties. After the first year, the company declared what they’d offer you on your annuity contract. You were, in essence, at the insurer’s mercy for the remaining six years, or you could opt to surrender your contract and face a surrender penalty. Keep in mind, you had a minimum guarantee, usually 3%, but the company determined what they would pay to annuity policyholders. Insurance companies referred to this company declared rate as the renewal rate.

Let’s go back about 20 years when interest rates were much higher. At that time my firm sold an annuity called the Century 200 Plus, and the first-year interest rate was a whopping 9%. Sounds great, right? Keep in mind, the Century 200 Plus had seven years of penalties so that 9% lasted only 12 months. Remember, you still had another 72 months of penalties remaining on the contract. The renewal rate for the second year went to 6.5%, which wasn’t too bad at the time. In the third year (the second renewal), however, the Century 200 Plus contract went down to 4%. That means that within two years, your contract dropped by five percentage points. Maybe you’re thinking that even 4% doesn’t sound so bad, and you’re right. But all fixed annuity contracts are associated with a corresponding bond portfolio. So those 9% bonds should have been with your contract for the entire seven years. Let’s look at it another way: Say you bought a 4% annuity and rates in the marketplace went up to 9%. Would your annuity contract interest rate go up dramatically? Hell, no. You’d be lucky to get 4.5% on your money.

When I look back on my years in the business, I’ve only seen renewal rates drop, which spurred unhappy annuity owners to threaten insurers with lawsuits. As a result, insurers focused on longer guarantees and started selling products that matched the guarantee period with the surrender period. (It’s similar to how banks handle their CDs.) And if you buy a contract with surrender penalties longer than the guarantee period, you, as the purchaser, sign disclosure forms acknowledging you know what the hell you are buying. But that applies only to traditional fixed annuities.

Much to my chagrin, renewal rate issues have arisen again in the fixed-index market because of the annual adjustments. Fixed-index annuities are based on stock market participation, and the ways of crediting interest can adjust or change every year. But most fixed-index annuity products don’t have seven years of penalties; they usually have at least 10 years. So how a company’s renewal rates have performed over the years is as vital as any annuity feature offered.

But here’s the big problem: getting renewal histories from companies can be like pulling teeth. Before you purchase a fixed-index annuity, I’d demand an official renewal rate history from the insurer. Feel free to request that information from your agent, but make sure the data comes from the insurer. The renewal rate history allows you to see how contracts have performed with that given insurer. Review the information closely before transferring any of your nest egg. If you can’t retrieve the renewal rate history, walk away from the purchase. A company that’s not willing to share its history with a prospective buyer is not an insurance company I want to have a seven plus-year relationship with.

If a third-party annuity rating firm did exist, the firm could retrieve and compare insurers’ renewal histories. American seniors need an independent source to consult before they purchase an annuity. Let’s keep our fingers crossed it happens soon!

Pay-it Forward:

Appearance matters for job interviews, so getting your son or daughter down to “fighting weight” should be a priority. When your post-grad returns home from college, make sure they join a local health club immediately. It will make them feel and look better, and it will give them an edge in the job wars.

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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