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When equity index annuities first came out, many were just too complex for Thomas Stratton to consider selling.

“Some EIAs are still too complex,” says Stratton, who is the marketing director of Financial Independence Systems, a Dania, Fla. broker-dealer.

Yet, sell EIAs he does. So do an increasing number of other producers. Fixed index annuity sales hit a record $4.9 billion for the first six months of 2002, according to figures just out from The Advantage Group, Maryland Heights, Mo. (see story on page 5), and similar growth is expected for the second half. Average premium is $36,807.

These numbers have some producers scratching their heads. The EIA market is still relatively small, they note, citing Advantage Groups finding that only 36 insurers are currently selling the fixed version of the product. And the product still does not have a high profile in the public eye, they say. “So, who is buying EIAs and why?”

More to the point, they are asking: “Should I start offering EIAs? Will my clients benefit from them? And how should I position them?”

“Clients today no longer tell me they want return on their money,” Stratton says of his own decision to work with EIAs. “They want return of their money.” When he noticed the changing mood, he reviewed EIAs and found some can be the right product for certain clients.

Fixed income clients are increasingly comfortable with EIAs because of the minimum interest rate guarantee, he explains, especially when they compare the guaranteed rate to todays “very low” current returns on bonds and bank certificates of deposit.

On the other hand, he says, equity investors who have lost money in the stock market downturn like the EIAs ability to provide exposure to equities (via linking excess interest credits to gains in an equity index) while still preserving principal.

The EIAs long-term returns may be lower than what is possible in a soaring stock market, Stratton allows, “but to many equity clients, the trade-off is worthwhile It gives them a way to start restoring what they lost in the market downturn.”

Many securities clients put off moving into fixed annuities and also into fixed EIAs, until it was too late, contends Katrina Savage, vice president of Alliance Financial Group, a Flint, Mich. agency offering securities and insurance. They thought the EIA returns were “too low,” she recalls.

By contrast, she says she liked EIAs as soon as they came out in the mid-1990s. “They are a perfect blend of guarantees and equity market performance.”

Some of Savages clients did end up buying EIAs in the later 1990s, but she says it took the stock market crash to convince others.

When some of the holdbacks first saw the double-digit returns their friends were getting on EIAs, “they told me it was too good to be true,” Savage recalls. But word got out, she says, “and then it was Katie bar the door.”

Starting in 2000, Savage says, clients moved over to EIAs “in droves.” Roughly 70% of the EIA buyers pulled money out of mutual funds held inside of IRAs, because they figured it was long-term money anyway, she adds.

“They love the guarantee of principal, and they love the fact that the EIAs I sell offer a choice of strategies,” Savage says. (Note: “Multi-strategy” EIAs offer various buckets, each linking to gains in a different index. Some have a fixed interest bucket, as well. Typically, clients can move money between the buckets.)

One planner, who also is an accountant and investment rep, suggests EIAs look more attractive today than previously because “they remove the clients assets from the field of battle.”

For investors who lost a lot of money in the stock market, “EIAs put an end to the bleeding,” explains Jeffrey Adelstone, president of Adelstone Financial Services Inc., Tucson, Ariz.

“A lot of our clients think its too good to be true,” says Adelstone, echoing the experiences reported by Savage. “But when I show them the terms of the contract, the guarantee, and the financial strength of the company (I use A-rated companies, at the very least), they listen.”

If a company rating drops to a B, he says he does not automatically recommend moving the money. “A B is still an investment grade rating,” he explains. But he does check the reserve ratios of the company to see what is going on. “If they are okay, the downgrade should not be a problem.”

He says his accounting background helps with these assessments, but adds that any advisor can do the same. “Contact the insurance company directly,” he suggests, “or ask the rating firm to send a copy of the rating report. Or, if its a stock company, get the insurers annual financial report from the Securities and Exchange Commission.

If a client still is skeptical about the EIA concept, Adelstone urges the client to “go, think about it, and come back with questions.”

Some people may have a closed mind to considering new products, he allows. But in his practice–which primarily serves middle-class clients–he says few reject products just because they are new or unknown. He believes that is due to the fact he spends about two-thirds of the first interview just educating the client.

In recent times, a lot of new clients are coming to him, after having lost a lot of money in ill-advised tech investments. Many did not employ diversification strategies. “To help them,” he says, “we explain the benefits of diversification, and also of EIAs. We tell them that, in the EIA, you cant lose any money, and you may even make up some of what you lost over time.”

This gets their interest, he says. “They like that the EIA means no more up and down. Now, they only have to deal with up” (the guaranteed interest and the upside potential).

Many of these individuals do believe the stock market will go back up again, Adelstone adds. “But the question, especially for seniors or those approaching retirement is, Will it be in my lifetime?”

Patrick Foley, president and CEO of Minneapolis-based Allianz Individual Insurance Group Inc., the top seller in EIAs for several quarters, agrees market volatility and the huge losses some people have sustained in the market have made EIAs “extremely appealing.”

As Robert TeKolste puts it, “this market is flushing people out. Theyre saying, enough is enough, I want safe money alternatives.” TeKolste is vice president-sales and marketing at Des Moines, Iowa-based Midland National Life, which ranks Number 2 in EIA sales.

But, if investors want to get out of equities, why would they then go into a product with “equity” in its name? “Because of the EIAs other key word, guarantee,” says TeKolste.

The EIAs various guarantees “are powerful sales tools” today, he explains, citing the guaranteed minimum interest, guaranteed cash value, and guaranteed lifetime income option as examples. “We also guarantee not to participate in the downs of the market index and to participate to some degree in its ups.”

Traditional fixed annuities and bank CDs have guarantees, as well, he allows. But they “lack the sizzle” of allowing owners to link to the market ups.

Besides, notes Foley of Allianz, EIAs pay more than CDs–much more, in the case of “bonus EIAs” that pay extra interest in the first policy year. Depending on the EIA, the bonus can equal 5% to 10% of premium or more.

“Bonus EIAs help clients make up for some of their market losses,” Foley suggests. At Allianz, “our top two selling EIAs are bonus products,” he notes.

Kevin Wingert, president of American Equity Investment Life Insurance Company, West Des Moines, Iowa, says another “very powerful” motivator in EIA sales is the fact that EIAs offer tax deferral on gains, as do all annuities. American Equity ranks Number 3 in EIA sales.

The policys death benefit before annuitization is an incentive, too, Wingert says. “For instance, we pay full contract value, not just surrender value, on death claims; thats very important to people who are at or near retirement.”

The multi-strategy design in some of todays EIAs is important as well, Wingert maintains. “That tells the customer their money is not locked into linking to only one index,” he says. “They can reposition funds annually in response to the economy or changing needs.”

Right now, he notes, about 40% of EIA money is going into the fixed interest bucket of American Equity EIAs. “I think agents are saying, Okay, lets get this started by putting your money into the fixed bucket; then, you can reallocate into other strategies later on, without penalty.”

Aging baby boomers are particularly interested in EIAs, contends Foley. As they become older, “they get more interested in having a floor under their money,” he explains. “Emotionally, they feel they cant withstand another 20% or 30% loss on their money, in part because they feel they have less time to make it up.”

Even in a market rebound, “boomers will not go whole hog back into securities as they did in the 1990s,” Foley predicts. “They will want to stayed diversified.” Since EIAs are an ideal way to do that, he predicts the current surge in EIA sales will continue. “Its not just a blip,” Foley says.

As for investors in general, TeKolste predicts that even in a sharp market upswing people wont leave EIAs. The losses sustained in the current market have “cut pretty deep,” he says. “People will remember their need for security.”

The complicated way some EIAs calculate their excess interest still troubles Stratton, the Florida broker-dealer executive. But certain EIAs are less complicated than others, he adds, so those are the ones he prefers to use, if they fit client needs and preferences.

Whatever the product, its important to explain it thoroughly, he adds, to ensure the client receives full disclosure.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.