How can an annuity offer the promise of gain from indexed products with the simplicity of a traditional annuity?

Security Benefit Life is hoping it has that answer with an annuity designed to fit in between the traditional and indexed segments by indexing to the London Interbank Offered Rate, or LIBOR, on top of a base rate for a guaranteed period.

The new floating-rate annuity, marketed as RateTrack, offers a five-year guarantee period option that yields a base rate of 2 percent and another percentage based on the three-month LIBOR rate. Total current credited interest rate in the first year: 2.63 percent.

The company’s seven-year guarantee period option credits investors 2.4 percent and 0.63 percent based on LIBOR for a credited rate of 3.03 percent in the first year, according to Security Benefit’s website.

If U.S. interest rates rise, LIBOR also will rise, since the Interbank rate typically tracks the benchmark federal funds rate. But if rates falter, LIBOR also will falter.

The LIBOR component is reset upward or downward annually, and the total credit interest rate is reset annually on the contract anniversary.

For clients looking for a steady income, that’s an improvement over many fixed annuities offering 2 percent, and it’s a whole lot better than a bank certificate of deposit or a money market instrument. 

Experts Favor Floating Rate Product

Jon Legan, an illustrations analyst for Annuity Rate Watch, an independent annuity database firm outside Boston, said RateTrack represents a “whole new category” of fixed annuity, not just a new index geared to control volatility on an indexed annuity product.

RateTrack’s simple, uncluttered design and the product’s reasonably generous interest rate floor offer encouraging signs that new products can be more simplified and transparent.

“It’s so much more clear to the consumer what they are getting and what they can hope for down the road,” Legan said.

But will this particular type of fixed annuity win over consumers in a world where fixed annuity sales rose 7 percent last year on the strength of fixed indexed annuities (FIAs)?

“I do think the product will do well,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, annuity data tracking services in Iowa.

“I also think that other insurance companies are going to copy Security Benefit Life’s design.”

RateTrack offers a relatively competitive credited rate, she said, “without the risks of reserving for a typical MYGA (Multi-Year Guaranteed Annuity). It will be interesting to see which insurance company will be the first to join Security Benefit in this new quasi-MYGA dance.” 

Sold Through Multiple Channels

Doug Wolff, president of Security Benefit Life, said RateTrack will be attractive to banks and financial institutions that sell fixed annuities and CDs to a primarily conservative clientele. Independent advisor representatives also should find some appeal in the floating rate annuity.

Advisor feedback indicated many annuity clients are hesitant to invest in annuities now if interest rates are poised to rise in the near future.

“When savers and consumers are nervous, they sit on the sidelines in cash waiting for rates to go up, but they have suffered,” Wolff said.

With average national yields on CDs at around 0.27 percent and money market funds at 0.11 percent, savings may be liquid, but they are also losing value, even with low inflation.

Security Benefit believes the time is right to launch a floating rate annuity because interest rates remain historically low and the equity market is volatile, Wolff said.

Stability-inclined clients who are willing to stretch a little more for yield will find themselves rewarded, thanks to the LIBOR “float.”

The LIBOR component, in effect a floating index, offers RateTrack annuitants a hedge against the lower account values dictated by rising interest rates. In theory, the floating rate instrument means no loss in market value of the annuity, as a potential buyer will want to pay full market value for the investment, Wolff said.

But what happens when LIBOR rates diverge from the federal funds rate benchmark, as they did between the second half of 2008 and late 2009?

LIBOR briefly rose, while the federal funds rate dropped. LIBOR eventually fell back to track the federal funds rate, but in any case, a floating rate annuity investor would have benefited because LIBOR rates were higher before falling to track the benchmark.

Unlike the popular FIAs that tie credited interest to a backward look over how an index performed in the past, RateTrack is tied to current rate movements. That is why Legan considers Security Benefit Life’s floating rate annuity a true hybrid annuity.

It incorporates elements of traditional fixed annuities while at the same time paying “homage” to FIAs by offering annuitants “upside” pegged to LIBOR.