Fed Rate Cut Could Speed Up Some Annuity Sales

What You Need to Know

Many life policies and annuities were written when the federal funds rate target range was from 0.25% to 0.5%.
After the cut announced Wednesday, the target range will be 4.75% to 5%.
Many clients can still get higher rates by replacing products written before 2022.

The new Federal Reserve effort to push interest rates lower could help life insurance and annuity sales, according to Jack Elder.

Elder, a senior vice president at CBS Brokerage, said in an email interview that rates are still much higher than they were in early 2022, when they began to shoot up.

The 50-basis-point cut that the Federal Open Market Committee announced Wednesday will be big enough to get consumers’ attention without doing much to hurt the appeal of life insurance policies and annuities, Elder said.

The cut sets the federal funds rate target range at 4.75% to 5%.

The effect could be especially good for variable and indexed annuities, because many consumers now hold contracts issued when interest rates were very low, he said.

Now, he said, if clients act before the Fed implements more rate cuts, they “can lock in higher interest rates and potentially benefit from the improved product features and benefits offered by newer annuities.”

What it means: Eventually, lower interest rates could hurt life insurers’ mood, by cutting what they earn when they invest new life and annuity premium payments.

But for now sales could keep rising.

The backdrop: Many types of savings products paid interest of 10% or more from the early 1970s to the early 1990s, when the Fed was trying to use high interest rates to cool the economy and control inflation.

Inflation and rates then began dropping.

Rates fell further after the 2007-2009 Great Recession, as the Fed used low rates to try to revive the economy.