10 minute read
Annuities cast a light when things seem dim
How to leverage rising interest rates to boost retirement portfolios.
By Jim Poolman
Several factors, including gross domestic product, unemployment and inflation, affect the strength of the U.S. economy. Although the economy is strong, the market has been experiencing the highest inflationary rates in 40 years.
Combating high inflation requires increasing interest rates, encouraging people and businesses to borrow and spend less. On Sept. 21, the Federal Reserve approved its third consecutive 75-basis-point hike, bringing current lending rates to a new range of 3%-3.25% — the highest they’ve been since the 2008 global financial crisis. Analysts predict interest rates will continue to 3.5% before the end of the year.
In theory, higher rates mean less spending, which translates to lower demand and should slow down price increases. But this could also lead to less economic activity. Rising rates and high inflation hit lower-income Americans the hardest as they face challenges purchasing necessities such as groceries and gas.
For retirees, it is a double-edged sword. While inflation diminishes a retiree’s purchasing power and increases lifestyle expenses, high rates on savings vehicles such as certificates of deposits or money market accounts mean they could potentially earn a little more.
Over time, however, inflation rates negatively impact how much retirement dollars can stretch. To combat this, individuals should consider products that help offset the cost of inflation. Annuities, for example, pay more as interest rates increase — casting a light when things seem grim. Rising rates may sound like music to the ears of investors debating whether to add an annuity to their retirement portfolios.
Interest rates and the annuity owner
In addition to being a safe accumulation vehicle, an annuity is also an income-generating product. Although there are different types of annuities, the good news is that interest rates determine their payouts. So, the higher the interest rate, the higher the annuity income payment. Data shows that average immediate annuity payouts have increased by more than 11% for men and 13% for women since 2022. The trend appears even more pronounced with longevity annuities, a deferred annuity that starts paying income later in life. Payouts have jumped 42% for men and women since the start of the year.
A fixed indexed annuity protects principal from market loss and will never decline in value so long as the annuity owner continues to hold it through the length of their contract. However, annuities also generate income from interest. The annuity’s interest rate is based partly on changes in a market index, which measures how part of the market performs. So as far as the economy goes, the higher the interest rate, the higher the annuity income payment. At the same time, the interest earning potential will never fall below zero, even if the index declines in value. This protects the product from inflation and helps generate higher income payouts at retirement.
How FIAs work
Generally, FIAs calculate index-linked interest in the following manner: » A participation rate, which is the percentage of an index that is used to calculate interest crediting. » And/or a cap, which is the maximum interest that will be credited. » If the index loses money in any given year, the FIA does not lose money but rather will credit 0% (the interest rate floor).
Together, the interest rate floor, participation rate and cap determine the amount of interest someone earns. The interest earnings rate will always remain between the floor and the cap, and it will not rise above the cap, even if the index goes higher. Conversely, it will never fall below zero, even if the index declines in value. The value of the money will never decline due to market loss for as long as it is in the FIA, although it can increase with a rising index.
If your client withdraws their money from an FIA before an index term ends, the annuity may not add all the index-linked interest for that term to their account. Additionally, like many long-term financial products, such as certificates of deposit or mutual funds, FIAs have a surrender fee for early withdrawal, depending on the contract.
Market volatility and rising rates have created a perfect storm for investors looking for ways to protect their nest eggs and generate a guaranteed income stream in retirement. According to LIMRA, first-quarter FIA sales were up 21% this year compared to 2021, and LIMRA is predicting FIA sales will grow as much as 10% by the end of 2022. Currently, lifetime fixed-income annuity payouts are up 29%30% from a year ago.
Retirement sentiments among Americans
Americans have never been confident about their retirement futures. Research conducted by the Indexed Annuity Leadership Council found that 42% of Americans say the pandemic has made them more riskaverse regarding their finances, and 76% of Americans say protecting their retirement nest egg from loss is important to them. Yet, as we face a potential recession, new research reveals that among those who have an annuity, 74% believe their savings and sources of income will last their lifetime, compared with only 43% for those without an annuity.
Americans do not want to outlive their income streams, and that suggests they are ready to embrace annuities and other retirement products that can provide lifetime income.
PEOPLE LIKE FIAS AFTER THEY LEARN MORE ABOUT THEM
• 54% of Americans said they never heard of an FIA. • 51% of Americans said they would consider setting up an FIA in the next 12 months after one was explained to them. • 77% of Americans ages 18-34 said they are more likely to consider an FIA after it was explained to them. • 30% of Americans aged 55 and older said they are more likely to consider an FIA after it was explained to them.
SOURCE: Indexed Annuity Leadership Council
Things to consider when purchasing an FIA
When discussing the purchase of an FIA or any other type of annuity as part of your client’s retirement plan, start with three things:
1. Know your client’s financial goals
and risk tolerance, how long they have before they retire, and what they will need their annuity payouts to fund. Understanding how and when they use their money will help them decide what to buy today.
2. Look into an insurer’s financial
strength rating. The rating is critical because annuities are backed by insurance companies, not the federal government. The higher the rating, the more likely the insurer will be around to pay out your client’s annuity.
3. Know the roll-up rate (percentage at which the guaranteed side of the annuity keeps growing) and the payout rate (percentage of the annuity your cli-
ent will receive) of an annuity. An insurance company’s portfolio of investments and profits may determine rates’ variations and can significantly vary between providers. Be sure to shop around to get the best quotes from different companies.
In addition to a steady, guaranteed and lifetime income stream with secured principal, FIAs offer predictable earnings and tax-deferred growth. Increasing interest rates present an opportunity to consider annuities as part of a diversified retirement portfolio. Other tactics to consider as you prepare your clients for inflation in retirement include rebalancing portfolios, pursuing alternative assets, liquidating assets to increase cash holdings, adding dividend-paying stocks to retirement portfolios and moving portfolios away from equities.
Retirement readiness shouldn’t be left to chance. And with the right amount of research and guidance, even uncertain times such as these can pave the way for thoughtful retirement planning.
Jim Poolman is executive director of the Indexed Annuity Leadership Council. He may be contacted at jim.poolman@ innfeedback.com.
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Medicare Advantage poised to grab half the market
The 2023 Medicare open enrollment period wraps up early this month, and Medicare Advantage is expected to account for more than half of Medicare, despite greater scrutiny of fraud allegations and criticism of MA’s benefits.
Not only are MA plans expected to serve a majority of enrollees, two companies will be responsible for nearly half of those enrollments: UnitedHealth Group and Humana.
QUOTABLE
Scams involving health care have increased exponentially.
— Delaware Insurance Commissioner Trinidad Navarro
MA plans and providers have been accused of fraud for overbilling the system, usually through upcoding, or the practice of finding a more lucrative designation for a patient’s conditions. That is because the system pays per patient, rather than for services — and the sicker the enrollee, the higher the reimbursement.
UnitedHealth, which has 27.1% of the market, has been accused of fraud by a whistleblower and the U.S. government, and has also been accused by the inspector general of being overbilled. Humana, with 17.4% of the market, was accused of fraud by a whistleblower and of being overbilled. Of the top 10 carriers, only Centene, with 5% of the market, was not accused of any fraud. Carriers have denied the allegations, saying their intent was to code patients accurately.
subsidized COBRA coverage for those who left or lost their jobs, enabling more people to remain insured.
After rising during the Obama administration and falling during the Trump administration, the number of Americans covered under Affordable Care Act marketplace plans rose sharply during the pan-
WHAT’S BEHIND HISTORIC HIGH COVERAGE RATES
The COVID-19 pandemic combined with the Affordable Care Act resulted in a historically high percentage of Americans having health coverage. Between 2011
and 2021, the percentage of Americans with coverage increased by 7.4% to
91.7% of the population, said Julian Polaris, Manatt Health associate.
More than half of Americans receive health insurance through an employer, with the rates of employer coverage fluctuating between 54% and 57% from 2010 and 2021. When unemployment increases, the number of people who have employer-based coverage usually falls. However, in 2021, the American Rescue Plan Act demic. As of 2021, 3.5% of Americans
— about 14 million people — were enrolled in ACA coverage.
Meanwhile, over the past decade, the number of Americans aged 65 and older has grown 12 times faster than the number of Americans younger than 65. During
that time, the proportion of Americans covered by Medicare has risen 4 percentage points. In 2021, Medicare covered 60.2 million Americans, or 18.4% of the total population.
FEDS ALLEGE ELEVANCE HEALTH DEFRAUDED CMS OF $100M
Elevance Health, previously known as Anthem, faces a federal lawsuit alleging it pocketed at least tens of millions of dollars by submitting inaccurate claims to the U.S. Centers for Medicaid & Medicare Services. The suit alleges the company did not check diagnosis codes it submitted for reimbursement between early 2014 and 2018 for its Medicare Advantage plans. A U.S. district judge said the financial costs to the government were “substantial” and not “merely administrative” — amounting to more than $100 million.
Elevance said the company operated in “good faith” and that CMS should update regulations if the agency wants to “change how it reimburses Medicare Advantage Plans for health services.”
WORKPLACE PREMIUMS REBOUND IN 2Q
New annualized premium for workplace disability insurance and supplemental health products increased in the second quarter, according to LIMRA’s workplace benefits sales surveys.
Total workplace disability insurance new annualized premium jumped 10% in the second quarter to $629 million. Despite
the strong premium growth in the second quarter, first-half workplace disability premium was $2.1 billion, down 4%, compared with the prior year.
Total workplace supplemental health insurance product premium, which includes accident, critical illness, cancer, hospital indemnity insurance and other health supplemental health insurance products, was $485 million in the second quarter, 9% higher than during the same period in 2021.
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