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Replacing Clients’ Old Annuities To Get New and Better Caps

Publish Date: March 8, 2023

This has come up a few times as interest rates have risen, which has resulted in better caps on new policies than what the clients’ old policies may be renewing at.

For example: I recently saw a renewal statement on a client’s policy where the RENEWAL participation rate was 185%. Although that seems very high, what is the participation rate on NEW policies? Almost 300%!!! So, the question is, does the client surrender their old policy to get the new?

First, is the carrier trying to “rip off” our clients that are in the old policies? No. Allow me to explain.

Annuity caps are based off “new money rates” that the carrier is able to invest their dollars in at the time the annuity was issued. And to simplify, the cap on the annuity will remain somewhat tied to those original rates, although there will be some ebbing and flowing as interest rates adjust. Not a ton however. The important thing to note with annuity/new money pricing is, when prevailing interest rates increase, annuity caps ON NEW ISSUES are very quick to respond, like what we have seen over the last year. The downside here is, as interest rates have increased and new issues are looking great, the renewal rates on seemingly identical OLDER policies are not keeping up!! Why is this? Because remember, new money pricing “kind of” forces the annuity to be attached to the original rate from when the policy was originally purchased X years ago.

Annuity/New Money Pricing is in contrast to “Portfolio Pricing” that carriers often use with life insurance. With portfolio pricing, the blended rate of the insurance carriers general account (or large “tranches” within the general account) is what determines the cap rates on IUL, whether those IULs are new IULs or renewal IULs. Over time, that multi-billion dollar chunk of investments will slowly go up and down with prevailing interest rates. The positive side to “Portfolio Pricing” is when interest rates are rapidly decreasing. When this happens, there is a significant lag in the amount of time it takes for that giant portfolio to get watered down by the lower rates. For instance, for the longest time we saw annuity caps plummet because of dropping interest rates while IUL caps held “relatively” stable. Now the inverse is happening with annuities. Rates are spiking up and annuity caps are as well.

Now, with what I just said about annuities, many agents are wondering if it would make sense to “surrender” old annuities to get the better pricing. The answer is, it depends on the scenario. Also, it depends on the carrier. Many carriers have rules such as, “as long as the net loss (after premium bonus taken into consideration) is less than 2% or 3%, then we will allow you to use our annuity to replace the old annuity.” Of course, that is me paraphrasing.

Also remember, this interest rate environment that we are in is exactly why “Market Value Adjustments” on annuities were created; To insulate the carrier from the bond losses they would have if your clients cashed out their annuities after interest rates have increased. It is no coincidence that the MVA formula in most policies is the same formula as pricing bonds given certain interest rates. With an MVA, as interest rates rise, the client’s surrender value decreases, all else being equal.

So, if you are considering surrendering a client’s annuity to go into a new one, heed the Market Value Adjustment, heed carriers’ rules, and talk with CG Financial Group to make sure you are doing the best thing for your clients.

Also remember, premium bonuses are rarely given because the carrier just wants to be nice. That pricing is made up elsewhere in the product.

Written By:  Charlie Gipple, CFP®, CLU®, ChFC®

Written By: Charlie Gipple, CFP®, CLU®, ChFC®

Charlie is the Founder and CEO of CG Financial Group, a financial services company that serves consumers as well as financial professionals. Charlie also owns and operates The Retirement Academy, which is an online resource to help financial professionals in running successful practices. Charlie is recognized throughout the industry as one of the foremost thought leaders and subject matter experts on retirement planning, life insurance, long-term care planning, leadership, storyselling, and behavioral finance. He is also an industry keynote speaker conducting 100-150 speeches per year. He has spoken at the MDRT Top of the Table as well as other large forums and has also appeared on TheStreet.com and AM Best TV. Gipple has vast leadership experience in the insurance industry as he has been an executive of various insurance companies and large Independent Marketing Organizations. With over two decades of experience, Charlie is unique in his broad knowledge across the life insurance, LTC, annuities, and securities businesses. He holds a bachelor’s degree in Finance from the University of Northern Iowa, is FINRA Series 7 and Series 66 licensed and also holds the CFP®, CLU® and ChFC® designations.


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