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Interest Rate Trends Changed the Annuity Market and Created an Opportunity

Last update on: Sep 13 2019

Interest rates changed dramatically in little more than six months, and that’s changed the landscape for annuity shoppers.

Payouts on immediate annuities, deferred income annuities (also known as longevity annuities) and fixed deferred annuities usually change with the interest rate on the 10-year treasury bond. Late in 2018, those annuities were offering their most attractive payouts in years. That’s no longer the case.

Last Nov. 8, the 10-year treasury yield was 3.24%. Recently, it plummeted to close to 2%. Annuity payouts usually lag market interest rates by about six months. So, insurers have been drop-ping their payouts lately, and those decreases will continue.

That makes this a good time for annuity shoppers, whether they’re savers or looking to generate income, to consider an indexed annuity, as long as they buy the right indexed annuity.

Many indexed annuities aren’t worth your consideration. They are marketed with less than 100% candor and sold to individuals for whom they aren’t appropriate. They also have high fees and don’t give investors the returns they were led to expect.

But that’s not the case with all indexed annuities. An indexed annuity usually guarantees your principal is 100% safe while giving you the opportunity to earn a higher yield than is available from CDs, money market funds, bonds and fixed deferred annuities. The interest credited to your account usually is tied to published investment returns, such as those of a major stock market index.

Typically, you don’t receive the index’s total return. You receive a percentage of it, known as a participation rate. There’s also a limit to the annual interest rate credit, known as a cap rate. For more details about indexed annuities in general, see my April 2014 issue.

Indexed annuities have surrender fees, requiring that you to lock up most of your money for a period of time. But there’s an anomaly today. Short-term interest rates have been higher than long-term interest rates, which is the reverse of the normal situation and known as an inverted yield curve. Insurers are mirroring the inverted yield curve.

They’re offering better deals on indexed annuities with shorter lock-up periods. You can take out an indexed annuity now when interest rates are hitting lows. You’ll capture a higher yield if stocks keep rising. You can exit the indexed annuity and move to a different investment or an immediate annuity in a few years after your surrender period when interest rates might be higher.

To identify the best way to take advantage of this situation, I conferred with my annuity expert, Todd Phil-lips, of Phillips Financial Services. He recommends the Lincoln National OptiBlend 5 Indexed Annuity.

In the OptiBlend 5, your account earns interest equal to the return of a stock index. You can choose from several indexes.

If you choose the S&P 500 Daily Risk Control Index (Ticker Symbol: SPXT5UT), there’s no cap on the interest credited to your account. For example, your account would have been credited with 13.57% in 2017 when the Vanguard Index 500 returned 21.67%.

Your principal is guaranteed not to decline, even if the stock index loses value. The annuity has no fees. The insurer makes its money from any account holders who pay the surrender charge by withdrawing early and on a spread between the interest credited to your account and what the insurer earns. The gains earned on your contract anniversary date each year are locked in.

With some indexed annuities, future negative returns can wipe out or reduce earnings from previous years. In the OptiBlend 5, interest is credited annually, so returns during the contract year could be given up if the index declines by the end of your contract anniversary. But your account’s value will never be less than the previous year’s value, no matter how much the market declines.

There’s a surrender charge if you withdraw from the annuity during the first five years of your contract. After that, you can withdraw the value of your account for any reason without penalty.

Also, you can withdraw up to 10% of your account’s value penalty-free each year during the first five years. And there’s no withdrawal penalty if you are admitted to a nursing home, are diagnosed with a terminal illness, or pass away. Lincoln National is considered a strong insurer. It’s been doing business since 1905 and has an A+ rating with A.M. Best, an insurance industry rating agency.

You can invest in the annuity through a traditional IRA, Roth IRA and most brokerage and non-brokerage accounts.

Most indexed annuities allow only a one-time lump sum investment, but the OptiBlend 5 lets you add money when you want. The OptiBlend 5 doesn’t have the additional fees, complicated riders, confusing bonus interest and tricky investment return calculations of most indexed annuities.

Indexed annuities such as the OptiBlend 5 are for someone looking for a chance to earn more than is available from traditional conservative investments while keeping principal safe.

For more details about the Lincoln National OptiBlend 5 or other annuities, contact Todd Phillips at Phillips Financial Services 888-892-1102 and tell him you’re a Retirement Watch reader. Todd will learn about your financial situation, determine if the OptiBlend or another annuity is right for you and send you a personalized example of returns.


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