The economy and financial markets in recent years — and particularly since the pandemic — have experienced significant volatility, with interest rates remaining low. While markets have generally rebounded since their sharp decline in spring of 2020, the looming volatility remains, and many agree that interest rates will likely remain low for the foreseeable future.
Low interest rates have their pros and cons. For the millions of Americans entering the housing market, the historically low rates on mortgages feel like a great deal. When it comes to investing in insurance products intended to supplement a retirement plan, however, low interest rates could be viewed as a liability.
Wariness Among Investors Remains
The aftermath of the market crash in 2008 that led to the Great Recession lingers in the minds of many investors. It resulted, in part, from banks and mortgage lenders issuing subprime loans to an influx of homebuyers. When those borrowers were suddenly unable to make payments on a house that was worth less than the amount they owed (in combination with other factors), the housing bubble burst, leaving millions underwater.
Things feel eerily familiar to some investors who are witnessing the recent boom in the housing market in response to low lending rates. Is this another housing bubble? Will 2008 repeat itself? If something happens, will your clients have enough money to live out their retirement years? These are the types of questions being asked daily.
Despite recent surges in the stock market and the economy, some investors remain wary of traditional investments, and the appeal of guaranteed lifetime income with fewer risks remains attractive. According to recent data from LIMRA, a worldwide research, consulting, and professional development trade association to the financial industry, the number one financial priority (and concern) among Baby Boomers and Gen X is having enough money for a comfortable retirement. Not far behind are Millennials who cite it as their number two concern, only after paying their monthly bills.1
Financial Strategies in Low Interest Rate Environments
This data suggests opportunities for advisors to share with their risk-averse clients about protection and accumulation-focused annuity products. In particular, wary investors may appreciate recommendations focused on fixed indexed, variable, and registered index-linked annuities.
These types of products typically offer relatively safe, short-term and longer-term savings vehicles with greater upside potential and attractive downside protection. Protection-focused income annuities may help investors by providing a level of guaranteed future retirement income.
When paired with adequate health insurance and types of insurance coverages that account for potential long-term care or chronic illness expenses, clients may feel less anxious about their financial futures.
Consumer Confidence in Financial Services Is Growing
LIMRA has conducted regular consumer sentiment surveys regarding the financial services industry since 2008. Understandably, consumer confidence toward nearly every type of financial service and institution fell considerably in the wake of the 2008 financial crisis.
Confidence levels have grown steadily since. In fact, confidence levels for financial advisors rebounded and surpassed their pre-2008 levels. Prior to the Great Recession, 24% of consumers expressed an “extreme amount” or “quite a bit” of confidence in financial advisors. That number jumped to 36% in 2020. The contrast is even more stark when compared to consumer sentiment during the height of the financial collapse in 2008 which dipped to just 11%. Fueled by increased confidence, the last decade saw the use of financial advisors nearly double (from 23% to 40% in 2020).1
For insurers, the confidence numbers grew from just 12% in October 2008 to 34% in 2020. Confidence in insurance agents and brokers more than tripled, from a meager 9% in 2008 to 32% in 2020.1
When working with clients to develop a strategic plan, consider including simpler annuity products with guaranteed returns that can compete with CDs, savings accounts or mutual fund rates. For a portion of your clientele, some risk may be acceptable, making them potential prospects for fixed income or variable annuities that offer upside potential and downside protection.
Naturally, the COVID-19 pandemic may have influenced the consumer responses noted here. This global event added a layer of complexity to retirement planning that no one could have envisioned. To aid you in navigating complex scenarios and financial situations, we’ve developed Elevate Advanced Planning resources. Access them today to help guide your client conversations.
Written by: Sonja V. Hayes, J.D., LL.M, M.B.A., CLU
Sonja brings more than 20 years of experience in financial services to CUNA Mutual Group. With a focus on insurance product solutions, Sonja works with financial professionals, CPAs and attorneys to clarify the complexities of retirement and estate planning and income distribution.
1 LIMRA, Executive Summary: Low Interest Rate Task Force Research: The Implications of Low-for-Long Interest Rates on Life Insurance and Annuity Business, 2021
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