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Inde AnnuitiesNot A Footnote Anymore

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Las Vegas

“What is the issue with today’s equity index annuities?” asked Steven Phillips here at the 2005 Producers’ Forum & Expo of the National Association for Fixed Annuities, Milwaukee, Wis.

The products first came out 10 years ago, but they’ve been “all the rage” in the last couple of years, noted the director of agent education at Creative Marketing International Corporation (CMIC), a major index annuity distributor based in Shawnee Mission, Kan.

“So, what changed?” he asked.

The answer, he said, is the environment changed and so did preferences. “It’s really a simple story,” he said. “These products are about principal protection, just as with traditional fixed annuities–that is, safety, security, tax deferral and minimum guaranteed interest rates.”

Phillips was among several speakers who examined the index annuity’s market position in 2005.

The products do offer “growth potential without market risk,” he said. But the sale is not about upside. A better approach would be to say “they share in some upside.”

Older people buy these products not because they are scared of dying, Phillips added. “They buy them because they are scared of what lies ahead if they live long.”

In presenting the product, agents and financial advisors need to address some index annuity myths, said Michael Tripses, executive vice president and chief actuary at CMIC.

One myth, from several years ago, has to do with bad information. For instance, some people predicted that the products would be a footnote in terms of other products.

But now, the market has a potential to do $30 billion in sales in 2005, Tripses said. “That’s evidence that the bad information is resolving itself.”

Later, he added that he thinks the product now has passed the tipping point, and he predicted it would see strong sales on through 2008.

A sign of the growth is that “the regulators are coming after the product” and the media are running more stories about it, too, he said.

Further, distribution now has broadened from the original insurance channels, Tripses said. For instance, banks are selling index annuities and so are registered reps. “In fact, 55% of the people I’m recruiting are registered reps.”

The growing momentum is showing up at CMIC, as well. Three years ago, index annuities represented one-third of CMIC annuity sales, but today they are representing 80%, Tripses said.

In short, “index annuities are not a footnote anymore,” he said.

Another myth is that they are complicated. They can seem complicated, if the presentation is not organized, he allowed. But he said communicating the index annuity’s value proposition is what’s needed. “The people in our shop said the following were important when buying index annuities having a monthly point-to-point formula–safety, tax deferral, guaranteed principal, protection from probate, and guaranteed interest…They said nothing about indexing at all.”

Using that value proposition, Tripses predicted that, within 10 years, a new paradigm will emerge for annuities. One group of annuities will focus on fixed principal protection, using indexed interest and guaranteed interest, he said. The other group will be the variables, focused on “direct participation in equity.” In the latter group, the various death benefit guarantees and guaranteed withdrawal features found in today’s variable annuities will meet client demand for some guarantees.

The growth will be in sales of “principal protected annuities,” he continued, noting the market positioning will follow the historical trend shown in the box on this page.

Gordon K. Williamson, founder and executive director of the Institute of Business & Finance, explored the importance of the “no risk of loss” issue. He noted how investments, including bond funds, have the risk that the investor may lose principal.

By contrast, the modern portfolio aims to give the best return at the selected risk level using asset allocation and a series of efficient portfolios, Williamson indicated. By incorporating fixed annuities into the asset allocation, “you include something that is 100% predictable,” he said. If the annuities replace bonds, for instance, “this creates stability. The agent can say to the client, ‘your stocks are down, but your fixed annuity is still crediting its interest.’”

These products are about principal protection–i.e., safety, security, tax deferral and minimum guaranteed interest rates

Annuity Positions

How They Track With The Environment

? Index annuities sales track with rising interest rates

? Variable annuity sales track with market ups and downs

? Traditional fixed annuity sales track with T-Bonds (except recently, reflecting growth in index annuity sales)

Source: Michael Tripses, Creative Marketing International Corporation, Shawnee Mission, Kan.


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