Today, in addition to linking to a major index to enhance returns, other client-helpful features are frequently becoming standard, indicating that the fixed index annuity is a product that is continuously in a state of evolution. In addition to a variety of return-calculation methods, insurers are regularly introducing other helpful features such as inflation riders, investment diversification, tax-deferred compounding, various withdrawal choices and living benefits. And as preparing for the Great American Retirement grows more challenging, the race to provide the most comprehensive fixed index annuity will only get more competitive.
A recent survey notes that 45 percent of American voters are not confident they will have the money to cover even their fixed monthly costs during retirement. One in six adults, or approximately 20 million people, have no retirement plan at all, according to a new national survey released last October by Americans for Secure Retirement ( www.paycheckforlife.org ).
Coincidentally, a Massachusetts Institute of Technology department of economics paper suggests the best time to introduce annuities into an individual’s financial plan is when a client reaches middle age. The report’s authors note that an individual’s ability to make relatively complex financial decisions peaks around age 53.
Pre- and new retirees can be especially sensitive when the value of their 401(k)s, IRAs or other investments fluctuate toward the downside. An understandable reaction to wild investment performance is a wish to move assets into a vehicle that can provide some stability from an erratic stock market while still providing the opportunity for growth of capital.
According to former Federal Reserve Chairman Alan Greenspan, the main forces driving financial markets can be boiled down to two basic human elements: Euphoria and fear. And while each is hard to track in economic models, euphoria, Greenspan says, causes market upswings, while fear causes economic downturns – with fear being the more powerful of the two.
In its most basic form, a fixed index annuity has the ability to protect capital while offering the potential to take part in growth of an underlying index, usually the S&P; 500. However, fixed index annuities now can offer clients a healthy level of market-index performance exposure as well as a no-loss provision – frequently an attractive feature to risk-averse individuals.
Other features help to make them one of the most competitive retirement products on the market and perhaps just in time. A 2007 AIG SunAmerica survey, “America Speaks Out on Retirement,” revealed that among baby boomers’ top financial goals are income for life (97 percent), protection against losses (96 percent) and continued growth of assets (96 percent). When asked if they would consider an investment product designed to address each of these goals, nearly three-quarters (73 percent) said they would be likely to do so and most expressed willingness to pay more for such a product, with two-thirds of boomers willing to give up 2 percent of their annual investment return for such benefits.
“The fixed index annuity has become a highly evolved product,” says senior advisor Dan McCarty in Latham, N.Y. McCarty, who likes to prospect those with a penchant for CD-investing, notes that the ability to lock in gains combined with “floor” protection has made fixed index annuities attractive to the previously leery. “Loss protection and the ability to take income without losing control of the asset has made them (FIAs) very handy.”
“Annuities have a place in some investor’s portfolios,” says Angela O’Neill, an advisor with the Strebel Planning Group in Ithaca, N.Y. “Concepts such as guaranteed death benefits, living benefits and income stream for life allow the more conservative client to fully invest in the market with downside protection and offer tax-deferred growth.”
“A fixed index annuity has always been and continues to be about safety,” says Jeff McLeod, an advisor in Sherwood, Ark., who’s been recommending them since 1988. “A fixed index annuity can improve upon the annual low interest rates because it’s tied to an index to generate extra income.”
While slight differences are common among FIAs, especially when determining how the variable interest rates are calculated, the foundation of each policy is fairly standard. What has evolved are the numerous options that are creating almost a tailored product. While guaranteed income for life is a standard feature, different withdrawal options to fund retirement are now common, as are index-linking choices to enhance future income. Inflation adjustment features and the ability to access cash in the case of an emergency are showing up in FIA policies in greater numbers.
McLeod, with a large senior clientele, notes that when one combines the guarantee from the underlying insurance company with some of the newer features such as annual and monthly point-to-point participation rates and the ability to lock in a monthly index average for a particular year, the fixed index annuity can be tough to beat for those seeking safety and lifetime income. “When clients tell me they want to keep their money safe and protect their principle, this is where I steer them.”
FIAs have emerged with characteristics of fixed and variable annuities while offering interest guarantees plus guarantees against loss of principal, while delivering traditional annuity benefits without being directly linked to the market. Many consider them to have less market risk than variable annuities with the potential to post gains exceeding those of fixed annuities. Some also offer bonuses, several crediting methods and investment diversification. They’ve become fairly sophisticated and that may be one of the stumbling blocks when trying to market an FIA. “There is a lot of variety,” says O’Neill. “Some are so complex even advisors have difficulty understanding the full implications.”