Producers consistently ask 3 questions about index annuities when they go through training courses on the products.
o How do insurance carriers invest premiums?
o Why do participation rates, asset fees/spreads and caps change?
o What is the “best” crediting strategy for the client?
Here are some answers, and some thoughts on the value of the training itself.
Generally, insurance carriers issuing index annuities use the first few pennies of every premium dollar to cover overhead expenses. This includes items such as employees’ salaries, marketing expenses, and commissions.
Next, they use a certain amount of the premium to buy government bonds to back the minimum guaranteed contract value. The higher the minimum guarantee, the more of the premium is required to support this promise. Carriers use the remaining premium to buy index options to cover the excess interest credited to the annuity based on its crediting strategy.
Many producers do not connect the fact that higher minimum guarantees impact the moving parts of the index crediting strategy. (For example, a contract paying 3% on 100% of the premium requires more money to be spent on bonds than one paying 3% on less than 100% of the premium.) Although the cost of bonds is considered to be an internal pricing component, the result is that, in the first scenario, fewer premium dollars remain to buy index options used to credit the policy’s excess interest.
This means lower participation rates, higher asset fees/spreads and higher caps. There are only so many pennies in each dollar, and each part affects the whole.
Confusion sets in because carriers tend to purchase index options differently and for varying lengths of time. In view of that, producers in my training classes take great interest in discussing the fluctuation among participation rates, asset fees/spreads and caps. Once they understand that these moving parts are not arbitrarily determined, but rather each is related to the investment of premium dollars and the cost of the asset being used to back the guarantee, producers seek out as much information in this area as possible.
The most popular questions revolve around selecting the “best” crediting strategy for the client.
Several experienced producers say they select an index strategy based upon its ease of explanation to the client. Others say they choose a strategy because they find a certain feature of another strategy difficult to overcome–e.g., one producer has met with much resistance to the cap feature, while another has found it challenging to explain a less than 100% participation rate. Fixed buckets are often used for a portion of the premium so the producer is not faced with a zero crediting return in a down market.
In all cases, my observation is the same: Producers choose strategies with which they are most comfortable and then proceed to teach their clients about that strategy. While certain index crediting strategies perform better in a bull market than in a bear market, never underestimate the power of the Magic 8 Ball.
Clearly, training enhances producer knowledge of the inner workings of index annuities. This results not just from producers learning the key points stipulated in state-required courses but also from answers to producer questions not addressed by the courses.
For example, there are significant restrictions in advertising and marketing index annuities. Words such as “investment” and “deposit” are taboo when speaking of index annuities. During the discussions, some producers seem to hear this important point for the very first time. Likewise, federal income tax and estate tax consequences of certain withdrawals and distributions from index annuities are not part of the Iowa training course; this seems to leave a void in producer understanding of product suitability for certain consumers.
As with most training classes, the outline is set as a guide; however, the instructors bring their own experience and perspective to the topic. Producers show strong interest in the anecdotal compliance pointers and “best practice” applications that instructors share along the way.
To date, two states–Iowa and California–require specific index annuity training for producers who want to sell the products. (See chart.)
It is encouraging to see this development. It is also encouraging to see that many key index annuity carriers have created their own online index annuity training courses–which the producers must complete before being able to sell the carriers’ products
In view of the value the training imparts, it is surprising that more states have not followed the lead of California and Iowa. But perhaps that will come. It is certainly needed, as uncertainty about index annuities and their fit with consumers’ needs can prove detrimental to all involved.
Danette Kennedy is president of Gorilla Insurance Marketing, Inc. Waukee, Iowa. Her e-mail address is firstname.lastname@example.org.