How Insurance Companies Price Annuities
Many advisors ask the question- Why do similarly rated companies have products with better or worse guarantees than another? There are two main factors, and I’ll use lifetime income FIAs as an example.
1. Adding higher rates for cash growth, liquidity waivers, or cash bonuses take away from the guaranteed income a company can offer.
2. An insurance company may be balancing their book of inforce business and doesn't want more lifetime income FIAs right now.
Now, let's get into how insurance companies price annuities... Insurance companies get the money used to build product by investing mainly in corporate, private, and government bonds. Generally, lower rated companies take slightly more risk to get higher bond returns, while others stay more risk averse and purchase higher rated bonds. Every company is playing in the same bond pool, so equally rated carriers will have fairly aligned returns.
Once a company’s bond portfolio is set, there are four main costs associated with building product: policy benefits, company expenses, ongoing admin costs, and commission. Here’s a hypothetical example to break this down: An insurance company put a bond portfolio together to make 7% per year. They may amortize 1% per year for commission expense, 1% for internal expenses, and have 5% remaining for policy benefits.
Using the example above, the remaining 5% for policy benefits is what goes towards building a product. Here’s how the three main types of annuities would look:
MYGA: Would offer a 5.00% rate for the duration.
Lifetime Income A SPIA payout would be roughly 7.50% for a 65 year old.
Cash Growth FIA: Would offer an annual S&P cap in the 8%-10% range depending on the option cost that varies based on short term volatility. **Note** the option cost for volatility controlled or proprietary indices is the same as the option cost for an annual S&P cap. Therefore, an index with a 200% par rate is assumed to return the same as an 8.00% annual S&P cap over the duration.
As a reminder, any additional features added to these policies will reduce the guarantees.
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Turn $100k into $11,000 of Income
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6.94% IRR at age 90
$286,000 total income at age 90
A rated Company
Notable Client Solutions**
Fee-Based 10.00% Guaranteed S&P cap
MassMutual Ascend is the go-to for fee-based cash growth focused FIAs. They offer a 10.00% annual guaranteed S&P cap for all 7 years of the surrender schedule.
Advisory fee charged out of the annuity
No rate renewal risk
10% annual withdrawal provision
A++ rated carrier
Fixed Rates
5.90% Simple Interest for 7 years.
Ibexis is the go-to for clients who are RMD age or want to withdraw interest annually.
0.65% higher than the next A rated carrier.
$4,550 extra interest withdrawn while maintaining principal.
* Rates may be subject to premium banding. Products may not be available in all states.
** Replacement must be suitable and provide the client with more guaranteed income.