As widely anticipated, the Federal Reserve has cut the interest rate, opting for a half-point reduction. Reaction to this has been mixed, but the interest rate is still higher than it was in early 2022. So how might the cut impact the sales of annuities and IUL products?
Any interest rate cut will invariably result in lower yields on fixed annuities, making them less attractive. Given the bond yields carriers rely on to fund fixed income products, they have little choice but to lower rates. For risk-averse customers looking for security, there may still be an opportunity to take advantage in the short-term before carriers make product adjustments.
In contrast, sales of FIAs are likely to get a boost. Money becoming cheaper tends to increase investment and raise stock price indexes. The FIA value proposition is enhanced by their improved upside potential without the direct risk of loss.
We may also see an increased demand for income riders on annuities.
Retirees might now find it challenging to generate sufficient income from traditional savings vehicles, so annuities with income riders can provide that guaranteed income stream.
A similar impact is probable in the IUL market. When interest rates drop, fixed-income traditional life insurance policies may underperform, leading consumers to explore IULs for their growth potential. In an environment where returns on bonds and traditional savings vehicles are weak, IULs still offer the potential for tax-deferred growth, market participation, and death benefits.
Naturally, insurers are not neutral parties here and will be looking to find their own angle while staying competitive. High interest rates in recent years have allowed them to offer significantly better returns but have also put pressure on their property and mortgage-oriented investments. Cheaper borrowing may result in insurers adjusting cap rates or participation rates, limiting the upside potential of FIAs and IULs. Producers should keep informed on upcoming carrier adjustments to guide clients effectively during this period of change.
Broadly, lower interest rates generally make retirement investing more expensive. This will mean the recently retired and those approaching retirement may need to pivot to strategies for asset diversification to achieve better returns.
Change always means opportunity. This is the case for everyone: carriers, advisors, and consumers. Flux in the economic environment inevitably prompts reaction from proactive investors, so this is a potentially lucrative period for advisors.
For producers, the rate drop is an opportunity to reach out to everyone in your book. Your clients may be feeling uncertain about how these changes affect their retirement plans, so a sensitive approach is advisable. Now is the perfect time to reassure them and update their portfolio to adapt to the new interest environment.
As we enter Q4 facing shifting dynamics, now is the ideal moment to assess client plans, ensure investments remain aligned with their goals, and help them capitalize on new opportunities.