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Presenting Inde Annuities: Be Clear About Their Role

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Fixed index annuities are here to stay, their popularity fueled by consumer demand for a financial product that has guarantees. They are not equities and should not be sold as such. (They are often called equity index annuities but should not be–because they are not equities.) They should be sold by agents as fixed annuity contracts.

Unfortunately, not all sales representatives market these fixed annuities properly. Frankly many of these representatives don’t understand the products well enough to make the proper disclosures to clients. Here are some pointers for improvement.

There is specific jargon to the fixed indexed annuity which field representatives should use when making a recommendation to purchase this insurance product. For example, gains in the contract, if any, are interest-linked and are not and should not be referred as units or shares.

Also, the sales rep must be sure the purchaser understands that these products are long-term accumulation programs which can be used to supplement retirement.

Additionally, when rep and client are comparing and contrasting the fixed indexed annuity to other options, do so by reviewing the company’s disclosure forms. My experience in selling these products is that the proper review helps clarify any potential misunderstandings the client may have in the future.

These products do have lots of moving parts, so the policies should be gone over very carefully at delivery. If the policy is not delivered properly, the client will have questions and can exercise the contract’s right of rescission (in the first 10 to 20 days, depending on policy).

Keep in mind the fixed indexed annuity has terminology and wording that is very different than straight fixed or variable annuities. Again, these are not equities. They should not be referred to as such. Furthermore, agents who do not comply with guidelines established by their insurance carriers or state regulators should not be allowed to market these products.

The financial advisor needs to take the time to understand the same disclosure paperwork that clients are required to sign. The agent also should discuss surrender charges/vesting schedule (same difference) and margin spreads (if this pertains to the annuity), and also make sure the client truly understands that an annuity is geared for some type of income distribution.

Clients who have purchased these products have a low risk tolerance, based on my experience. (Notice there is no use of the words investors or investment in that statement.) So, it helps to explain to them that the interest is linked to several different U.S. stock market barometers but that the monies the clients have deposited are not in the market. Interest and index crediting (done at the end of the client’s contract year) are locked in and cannot be lost like values in a stock mutual fund, variable annuity, or stocks themselves.

Explaining the basic concepts accurately and fairly will create the proper expectations for the fixed index annuity. Use it to make a difference for clients who don’t want their money disrespected in low interest rate products or lost to the market.

The focus should be on how the products provide guarantees for the consumer with market-linked or market-related returns. Those selling fixed indexed annuity products must be properly trained. The more the issuing companies train their agents on proper sales, the less confusion there will be about what the products are and where they fit in the financial plan.

David A. Kutcher, CSA, CLTC, is president and owner of DAK Financial Group, an Alton, N.H., marketer of index annuities and other financial products. His e-mail address is [email protected]

Explaining the basic concepts accurately and fairly will create the proper expectations for the fixed index annuity