Contract Renewal
Many Fixed-Indexed Annuities have recurring surrender penalties, in other words, a brand new surrender charge period at the beginning of each term. This is a positive step for our industry. Can you imagine an insurance company sitting on a book of 5 billion dollars of annuity premium where surrender penalties have already disappeared? How does the insurer invest those dollars? Short term or long term? What if interest rates then skyrocket? What kind of interest rates does the insurer give to its policyholders who have penalty free access to all of their dollars? What if another insurer surfaces paying higher initial interest rates? It is scary, isn’t it? Few insurers can withstand massive surrenders, exchanges, and rollovers during a short period of time and the resulting bad press.

With almost all Fixed-Indexed Annuities, annuity owners have – at the end of the surrender charge period – 15 to 60 days to withdraw all or some of their money, or owners can exchange their Fixed-Indexed Annuities for another insurer’s annuity without any insurer penalties. Naturally, annuity owners can also renew their Fixed-Indexed Annuities or exchange their annuity for another type of annuity with the same insurer. When this occurs and it will occur more times than not, the surrender charge period reappears again.

A brand new surrender charge period enables the insurer to invest more appropriately by purchasing – for example – investment grade paper supporting the insurer’s guaranteed minimum value and call options enabling the insurer to credit the annuity with a percentage of the index’s growth. A call option is the right to buy an index or stock at a predetermined price at a predetermined date (like at the end of 1 year or 7 years). For example, if I have the right to purchase common stock in General Electric 7 years from today at $100 per share, the value of my call option is worthless if General Electric is selling for less than $100, 7 years from today. Therefore, my only cost would have been what I paid for that call option. On the other hand, if a share of General Electric were selling for more than $100 per share 7 years from today, then my call option would have value. This is how some insurers are investing for Fixed-Indexed Annuities. They are investing 60% - 95% of the premium in investment grade paper to support the guaranteed minimum value.