Q: "Is it a good idea for banks to offer bonus rates on fixed annuities?"
Fixed-rate annuities are big business at banks - in part because many insurance companies are offering bonus or "teaser" rates to first-time buyers of these tax-deferred investment contracts.
In a round of interviews with bank investment product executives, American Banker found divisions over the practice of offering bonus rates.
Some bankers said they're are a good way to introduce investors to a new product. Others worried that the teasers - typically good for only one year - can create false expectations among annuity customers.
But all five executives agreed on one point: If banks are going to offer bonus-rate annuities, they must make clear to customers that the above- market yield won't last beyond the first year.
Jack D. Cussen
Executive vice president, Summit Bank
Chatham, N.J.
In many instances it is a good idea for banks to offer bonus rates on fixed annuities, but it must be fully explained to the customer.
If the bonus rate on the fixed annuity fits with the customer's needs, and satisfies their financial requirements, then it is a good idea. The concept is not dissimilar to the teaser rate in the residential mortgage business.
The bonus fixed-rate annuity requires particular emphasis of the bonus feature due to the renewal rate adjustment at the end of the first year. The customer should be aware that the renewal rate will not include a bonus feature.
Finally, the bonus-rate annuity potentially serves as a stepping stone for the customer to meet with our investment representatives to consider alternative financial products. This may, over time, and if suitable, turn savers into investors, thus making their financial planning task more flexible.
Lou Mastropietro
Investment sales director, National Westminster Corp.
Jersey City
The bonus rate is a good idea. But the customers' needs and objectives must be ascertained before they can invest in any product. It's a question of getting the most efficient product to address those needs.
You need to make sure the customer understands how the annuity works. In the case of a bonus-rate annuity, it's imperative that the information - for example, the first-year bonus rate, the tax deferral feature, and so on - is understood by the customer.
The way a bonus-rate annuity is structured is that the insurance carrier pays - usually - 1% above the normal rate in the first year it is in force. And at the end of the first year, the typical renewal rate will be in force for the remainder of the contract.
The bonus annuity allows the customer to enjoy a higher rate up-front in the first year, but the long-term objective of the customer has to be considered.
Kurt Laning
Assistant VP for bank marketing, Great Western Life and Annuity
Columbus, Ohio
Is the bonus-rate a good idea? Yes and no.
A true value-added bonus implies that someone else gave up something to pass more interest rate value onto the customer. In many cases, it is commission or certain other products features. Somewhere down the road someone may have to pay for that bonus.
Insurers use different profit and pricing assumptions based on their own experience, so true product comparisons and conclusions about future performance are difficult to assess.
The big negative aspect of bonus-rate annuities is the potential rate shock at the end of the bonus period, especially if interest rates have moved up.
It is common to see customers with selective memory who may have forgotten that the bonus ends at the end of the first year. To overcome this rate-shock, a bank and insurer may add value by spreading the bonus interest over the entire contract instead of just for the first year.
Mark E. Stevens
VP of financial services, F&M Financial Corp.
Salisbury, N.C.
We offered bonus-rate annuities six years ago. Now the only time I will sell one is if a consumer asks for it. I will explain that we do have bonus rates if the consumer is shopping for it, but typically I tend to stay away from them.
The renewal rates of the bonus products are typically less than the renewal rates on standard annuity products. If you were to disclose what a bonus rate does up front, most people would not be interested. They understand they will eventually pay for it.
We show people that we have both on the menu, and suggest to people to go for the nonbonus-rate route. We explain the differences to them. The consumer will come out better with a nonbonus rate.
I believe that bonus rates are an attempt for the bank to make up for deficiencies in the sales process and eventually the bottom line. It leads the consumer to focus on nothing but rate. If banks can develop trust instead of just selling products, you wouldn't need the bonus rate.
Clifton J. Saik
Executive VP, trust and investments, First National Bank of Commerce
New Orleans
From the perspective of the client, the bonus-rate annuity is a good deal since they are getting a higher rate in the first year.
But if you are selling a product with a bonus rate, you need to be sure that the client does not expect the same return in successive years.
Explain what they would have had if the bonus rate were not in place. That way, no matter what happens with interest rates next year, they will know how much more they received on the investment.
The biggest problem with the bonus-rate annuity is that customers usually think they have been trapped into some product for an extended period of time. Customers think there is an amount they will have to pay to surrender a charge - the bait and switch.
You have to disclose everything up front and make sure the customer understands. Otherwise, you would have been better off selling the annuity that the clients make less money on or not selling them any annuity at all.
