Contrary to what you may have read in the financial press, tax-deferred annuities are far from dead. According to LIMRA, fixed and variable annuities raked in U.S. premiums of $184 billion in2001, and are on pace for similar results this year.

Ask financial professionals how the tax-deferred annuity market has changed, and you hear two answers:

  1. Sales have shifted from "new money" to exchanges of older annuities.
  2. Banks are the new competition.

Banks are especially active in the fixed annuity market, which has surged back to life with the stock market's decline. According to the Kehrer Report, banks wrote $8.9 billion of fixed annuity premium in the first quarter of 2002, up from $5.0 billion in the first quarter of 2001. This year, about 40% of all fixed annuity premiums in the U.S. will flow through banks, Kehrer data indicates.

Why Banks Are Gaining

Why are banks gaining market share? Two words hold the answer: "rates" and "bonuses." As interest rates have declined, the gap between CD and fixed annuity rates has widened. According to Kehrer, bank customers can earn "base" fixed annuity rates that average about 2.5% more than CD rates. When banks add "bonuses" often credited on exchanges of older contracts (or CD rollovers), the yield gap increases to 3.5%.

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