The Buzz On Bonus Equity Index Annuities
Are bonus equity index annuities becoming the love-em-or-hate-em annuity products of 2003?
Also called bonus index annuities or BIAs, the products are annuities that pay an extra interest rate–the bonus–in the first year (or sometimes first several years) of the policys life.
They are a variation of traditional index annuities. The traditional products are fixed annuities that link their credited (or excess) interest to gains in a monetary index (equity, bond, etc.) as well as pay a guaranteed minimum interest rate.
It is the bonus interest feature–and design elements that support the bonus–that gives BIAs their distinction.
BIAs supporters have seen sales mushroom. For example, in 2003 so far, roughly 50% to 70% of Jeffrey Lewiss annuity business has been in BIAs. Lewis is president of Harvest Financial Inc., Salt Lake City, Utah.
The products are also making waves at Preferred Financial Brokers, Denver, Colo. Karlan Tucker, president of the firm and a broker who also does personal production, says BIAs are his companys lead annuity product.
A few insurers are seeing similar trends. Take market leader Allianz Life, Minneapolis, Minn., for example. Patrick M. Foley, president and chief executive officer of Allianz Individual Insurance Group, says bonus products now account for 80% of the insurers equity index annuity sales volume.
To present that in context, Foley points out that, in the first six months of 2003, Allianz produced $2.5 billion in total equity index annuities and earned a 34% equity index annuity market share.
Jack Marrion, owner of The Advantage Group, a St. Louis, Mo., index product tracking service, confirms that bonus index annuities have become big sellers at index annuity companies.
“In the first half of 2003, seven of the top 10 index annuities, by premium volume, were bonus products,” he says. Also, bonus products accounted for over half of the industrys total index annuity sales (estimated at over $5 billion).
This increase in BIA sales occurred even though many carriers cut commissions and shortened surrender periods on index products, Marrion points out.
Not everyone who likes index annuities likes the bonus version, however.
For example, Dale Humphrey, senior vice president-annuity sales at BISYSs Annuity Solution Center, Madison, Wis., says he is “biased against the bonus products.” This is despite the fact that his firm sells a lot of index annuities.
So, too, is Michael Kaselnak, principal of Piece of Pie Marketing, Rochester, Minn. “We sell about $150 million a year in index annuities, but very few are in the bonus version,” he says. “Im actually prejudiced against the bonus products.”
Still others take an “it depends” point of view. Some BIAs can be suitable for some clients, explains Joel Koeniguer, principal of Producers Choice, a Kansas City, Mo., marketer of index annuities. But in each case, the producer needs to check out the clients needs, the product design, the ratings of the issuing company, the broad asset allocation framework and many other factors before recommending them, Koeniguer cautions.
Why such broad disparity in viewpoint? BIA advocates believe the products are good for consumers, producers and companies. Opponents worry that the bonus may cost more than customers and producers realize, especially if disclosure is not adequate. What follows explores both views.
Bonus index annuities have grown increasingly popular in the past six to eight months, says Lewis, the Salt Lake City producer.
Especially popular are BIAs that credit and vest the premium bonus from day one of the policy. Less popular are designs that credit the bonus at the end of policy year one or over several years, he explains.
The sales driver, he says, is that most bonuses range from 5% to 10% of premium, depending on product. A few BIAs allow a choice of bonuses, too.
That bonus amount has strong appeal to owners of bank certificates of deposit, many of whom are now earning only 1% to 3%, Lewis contends. These owners see the BIAs bonus, combined with its guaranteed interest rate of 2% to 3% and its upside crediting potential, as a way to make up for low CD returns, he explains.
In fact, Lewis says, some CD owners want to cash out their CDs before the maturity date just so they can put the money in a BIA.
Similarly, clients who have poorly performing fixed annuities often want to exchange their older contracts for a BIA, Lewis adds. If the older policys surrender charge is still in force, he says he points out that part of the bonus can offset the surrender penalty the client will need to pay.
Another market where EIAs do well is the age 55 and up demographic, according to Tucker, the Denver broker and personal producer.