The Federal Reserve’s FOMC decided to raise rates on December 16th 2015 for the first time in almost a decade.
"With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate," Fed Chair Janet Yellen said in a press conference after the rate decision was announced. "The economic recovery has clearly come a long way."
What does this mean for the life insurance and annuity marketplace?
A boost to life insurance buyers and life insurance companies. The long history of low interest rates has caused an increase in life insurance premiums and an exodus by insurance companies from low cost products offering long term guarantees. This first move from the Fed may represent the beginning of a more normalized interest rate environment where insurance carriers can confidently commit to competitive pricing while maintaining profitability.
Consumer interest has leaned heavily towards low priced term with level premiums for 10, 20 or 30 years and universal life with death benefits guaranteed to age 100, 105 or for life. Insurance companies who have stayed in this market and those who will enter the market need a boost in interest yields. Insurers with old blocks of universal life business, much of it with minimum guaranteed cash value crediting rates of 4.5%, have struggled with managing these policies in an environment where US 10 Year Treasury yields have been under 3% and often under 2%.
A recent round of increases in UL cost of insurance and monthly deductions may in part be attributed to the low interest rate environment. An increase will relieve this pressure benefitting both policy holders and insurers. This Fed move, although small, is a win for insurance companies, policy holders and those buying new life insurance policies.
Share this infographic with clients to show them the impact this change may have on them.
As noted in the infographic above rising rates generally draw money from stocks into fixed income investments like bonds and CD's. As Fixed Indexed Annuities (FIA's) have continued to break sales records in 2015; we do not expect this trend to change due to this small increase in rates. As noted by Fed chair Janet Yellin, the economy has come a long way; yet, investors are still showing indications of low-risk tolerance. Fixed and Fixed Index Annuities still offer a great solution for clients looking for guarantee upside potential with no downside risk.
Want to read more on the rate increase? Check these out: U.S. rate hike is a major milestone for retirees & Rate hike spells some relief for independent broker-dealers