The Buzz On Bonus Equity Index Annuities

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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.

Many such clients own mutual funds that dropped in value by 50% or more over the past three years, he says.

“Some were told, when they first entered the stock market, that the safe way to go was asset diversification,” Tucker says. “Now, though, they see that stocks, mutual funds and variable subaccounts dont have a safety net.” Some tell him they are “sick and tired of the market” and they “need to do something else.”

What these clients really value, surmises Tucker, is safety of money and not losing principal.

Accordingly, he positions the bonus index annuity as a product that will enable them to grow their money in a way that fits with their values. The product can do this, he says, because it has a guaranteed interest rate, the bonus and the upside potential from the interest linking.

BIAs are for the long run, Tucker stresses. Presenting them “should focus on values, not performance of assets.”

Despite the sales opportunities and successes some producers have seen, other producers have their reasons for steering clear of the product.

A common complaint is that, in order for an insurer to offer an attractive bonus, the insurer has to take something away, says Kaselnak, the Rochester, Minn., producer. “The bonus has to come from somewhere, and thats going to be either the agents commission or the policy design,” he says.

Example: The client may choose a BIA with a longer than average surrender charge–say, 15 years–in order to get a big upfront bonus–say, 10%. In this case, says Kaselnak, chances are the client wont come out ahead. Such products tie up the clients money for a long time, he explains, and they tend to pay higher commissions, thus minimizing growth potential.

(Note: Tucker, who sells BIAs with a long surrender charge and a strong bonus, agrees that liquidity may be a concern for some clients. However, he says that in the product he sells, the owner can surrender the policy after four years and get 100% of the principal back, after charges. When clients learn about this, he says, it “helps eliminate fear of locking up the money for too long.”)

Some other BIAs make the bonus conditional on death or annuitization, says Kaselnak. Still others apply market value adjustments.

If the agent discloses whats in the product and the client still buys, he says, thats OK, assuming the BIA is a suitable product for the client.

“And if the agent offers, say, a 7% bonus and takes a 50% cut on the commission, thats viable too. That way, we all share the pain–and some gain.

“But I am concerned that very few agents explain the details or what will happen in the subsequent years,” Kaselnak adds.

Humphrey, the Madison, Wis., broker, says he tends to avoid selling BIAs because he believes “many are too complex and they have too many moving parts” (in order to compensate for the bonus). If Humphrey sells a BIA at all, it will be one with a shorter surrender period (“seven years is reasonable”) and a lower commission (“6% to 8% is reasonable”).

“It has to be a sound product from a strong company, with a meaningful rate of return and a good enough commission, that doesnt expose the consumer to risk,” Humphrey says.

The products that pay a modest first-year enhancement, say 1%, and have a shorter surrender period are “more straightforward,” agrees Koeniguer of Kansas City. “This helps with the integrity issue, and it wont hurt the customer, especially if the costs are spread out over, say, seven years.”

Marrions suggestion for producers is to “remember that there is no such thing as a free bonus.”

Agents need to understand where the bonus is coming from, he stresses. “Compare the products, the bonuses, the compensation levels and the other features. And see if there are strings attached.”

Consumers today are using bonus products to make up for the market losses and as an alternative to the low interest rates in todays environment, points out Foley of Allianz.

In presenting the product, therefore, producers should find out not only the clients needs, he says, but also what the client wants to do–i.e., make up for market losses, etc. Then, says Foley, look at the product performance based on the needs and wants of the customer; find a company with ratings that suggest outstanding safety; and look at the commission structure.

As for index annuities in general, whether bonused or not, Humphrey predicts they will not gain major market expansion until distribution spreads to wire houses and registered representatives.

Such channels “have traditionally been cool to index annuities and to any insurance-based product that has the word equity in it,” Humphrey allows.

However, he has noticed that some are now showing interest in equity index insurance products–if the products are “easy to explain and of high consumer value.”

Therefore, he is urging the index industry to move design–including design for BIAs–in that direction.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 11, 2003. Copyright 2003 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.