Why fixed indexed annuity and income rider rates follow bond yields, not the Fed

When the Federal Reserve changes its policy rate, the headlines say rates are moving, and people reasonably expect annuity offers to change the same day.  That is not how fixed indexed annuities, or their income riders, are priced.

An insurer invests your premium mostly in longer-term bonds bought in the open market.  The bond earnings fund the guarantees and pay for the options that support index credits.  They also help support the income rider.  What the insurer can offer follows what it can earn on those bonds on the day it buys them, less costs and margin.

Four steps from the bond market to your offer

• Bond yields.  What longer-term bonds pay in the open market today.
• The insurer’s portfolio.  Where your premium is invested.
• Budget and costs.  Bond earnings fund index credits and the rider, after costs and margin.
• Your offer.  Strategy terms and income rider rates.

Why this matters

• It explains the headlines.  The Fed can move its policy rate without longer-term yields following, and the reverse is also true.
• It changes how you compare.  Income rider rates and strategy terms should be compared on the day you buy, using that day’s quotes.
• It reduces anxiety about timing.  Nobody can reliably predict where bond yields will be next quarter, so a retirement income plan should not depend on it.

Offers follow what the insurer can earn on bonds today, not what the Fed said yesterday.

Where fixed indexed annuity offers come from

The sequence is easy to follow once you see the order of events.  The insurer cannot promise more than it can reasonably support, so its offers follow its investment income and what its hedging costs.

• You purchase.  You place a premium with the insurer and, if you choose, add an income rider.
• The insurer invests.  It buys mostly high-quality bonds at the yields available that day.
• Earnings fund the promises.  Bond earnings, less costs and margin, support index credits and the rider’s guarantees.
• Terms are set.  The contract states which terms are guaranteed and for how long.  Review what can change.

Where the Fed fits in

The Fed’s policy rate is an overnight rate.  It strongly influences savings and money market rates.  Longer-term bond yields are shaped by expectations about inflation, growth and the future path of the policy rate.  The two often move together, but not one-for-one, and sometimes in opposite directions.

When yields are higher

• The insurer can earn more on new bonds.
• That may allow stronger strategy terms or higher income rider rates.
• Changes tend to show up gradually, not instantly.

When yields are lower

• The insurer earns less on new bonds.
• Strategy terms or rider rates may tighten.
• Rider guarantees you already own do not change.

Two different rates, two different jobs

The Fed sets the short end.  The bond market sets the long end.  Annuity offers live at the long end.

Six factors behind an income rider quote

Two contracts quoted on the same day can show different income rider rates.  The bond market is the starting point, and the rest depends on you and on how each contract is built.

Questions worth asking when you compare income rider quotes

• Which rates are guaranteed at issue, and for how long?
• Is the payout based on the income base or the account value?
• What is the annual rider fee, and how is it charged?
• What is the date of this quote, and for what age and single or joint life?

The income base is a calculation used to determine rider withdrawals.  It is not a cash value and is not available as a lump sum.  Index credits depend on index performance and can be zero in a given year.

Five practical takeaways

Once you know where the terms come from, the practical steps are simple.  None of them depends on predicting the Fed.

• Do not try to time the Fed.  The Fed’s decisions do not set annuity offers.  Planning around a meeting date adds guesswork without adding information.
• Compare on the day you buy.  Rates and terms change.  Ask for quotes with an “as of” date, using the same age and single or joint life, across carriers.
• Ask what is guaranteed and for how long.  Know which strategy terms and rider rates are fixed, which can be reset, and what happens when a period ends.
• Look past the headline rate.  Compare the rider fee, the payout base, withdrawal rules and the strength of the insurer behind the promise.
• Review older contracts carefully.  A rider you own may already hold valuable guarantees.  Check surrender charges and any benefits you would give up before changing anything.

Key takeaways

• Indexed annuity and income rider offers follow the bond yields insurers earn, not the Fed’s policy rate.
• Compare quotes on the day you buy, for the same age and income option.
• Look at the rider fee, payout base and guarantees, not only the headline rate.
• Do not give up valuable benefits in an existing contract without a full comparison.

If you want today’s income rider quotes compared side by side, that conversation is complimentary and carries no obligation.  Call 317-900-6970 or start a conversation.  Meetings are by phone, video, or at your home.

About the Author

Ted Byrer, CAS®, is a Retirement Income Specialist and Independent Insurance Agent with Byrer Wealth Management, LLC in Westfield, Indiana.  Learn more at Ted Byrer.

This article is educational only.  It is not legal, tax, or investment advice, and it is not a recommendation or solicitation to buy any product.  Fixed indexed annuity strategies, crediting methods, income rider terms, payout percentages, rider fees, guarantee periods, surrender charges, and availability vary by carrier, state, and contract and change frequently.  Any rate or term must be confirmed with the carrier as of the date of purchase.  Index credits depend on index performance and can be zero in a given year.  An income rider provides guaranteed withdrawals based on an income base, which is a calculation value, not a cash value, and is not available as a lump sum.  Guarantees rest solely on the claims-paying ability of the issuing insurance company.  Annuities are insurance contracts, not deposits, and are not insured by the FDIC or any government agency.  Withdrawals may be subject to surrender charges, ordinary income tax and, before age 59½, a federal penalty tax.  Byrer Wealth Management, LLC is an independent insurance agency.  It is not a registered investment adviser, broker-dealer, or bank, and does not offer securities.  Byrer Wealth Management is compensated by commissions paid by insurance companies.