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Life Health > Annuities

Selling Index Annuities in Anxious Economic Times

By Diane Shemi

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Many leading economic analysts think we’re already in a recession, or headed for one, and Wall Street is reeling. During the last economic slowdown, anxious investors pulled their money from stocks, mutual funds, and other financial instruments and headed for the housing market, which was still booming despite all odds. In fact, for decades, housing has been the fall-back position when Wall Street goes south.

No more. In today’s economic climate, it’s anyone’s guess as to which option, if either, is more viable. Anxious boomers and retirees increasingly demand anything they can to protect their nest eggs and, hopefully, realize at least some return on their investments.

In today’s volatile markets, diversification may well be more important than ever, and clients realize that. For agents selling fixed index annuities, this presents a problem: How can you offer diversification when the S&P 500 Index is the de facto standard for index annuities?

The S&P 500
It’s not that there is anything inherently wrong with the S&P 500. In fact, one of the reasons why index annuities have been so successful is the underlying stability and growth potential offered by this index. Consumers recognize and trust the S&P 500 brand, and that brand has played a large role in establishing index annuities as a viable retirement vehicle.

A problem arises, however, because crediting methods for annuities are tied almost exclusively to the S&P 500. True, the S&P represents 500 diverse companies, and carriers achieve differentiation in the way the interest is ultimately calculated. Annual point-to-point with cap or participation rate, monthly cap, and the high water mark crediting methods are among the most popular. Unfortunately, there is very little index diversification. While a few carriers offer products tied to other indices — NASDAQ, S&P 400 MidCap, and Russell 2000 — most index annuities are based on the S&P 500 and if it doesn’t thrive, neither do the annuities that are based upon it. In addition, if the American market is down, those few annuities that are based on other U.S. indices may falter, as well.

What the market demands is a big step forward in index diversification — more breadth and depth, more options — and a few progressive companies are answering the call. There are new index annuities offering the kind of diversification that can help protect your clients in a tumultuous market, and more are in the pipeline. Annuities based on new types of strategies and indices will meet this need for diversification — for example, those based on international indices and those that “blend” various indices. Agents who adopt these new offerings stand to do well in today’s economy, as well as in the future.

International indices
Annuities based on international indices offer a rare opportunity to participate in the world economy while still enjoying the benefits of an S&P-based annuity. Although we recently witnessed the negative impact that the U.S. economy can have on the world market, for the most part, markets in other countries are experiencing tremendous growth, and nobody expects that to end anytime soon. Because various markets respond differently to economic conditions and regional events, an annuity based on an international index offers the diversification that makes sense in a down U.S. market.

Currency and exchange rates also come into play. In a global economy, for example, a weak U.S. dollar can work in several ways. Most obviously, U.S. products are cheaper in foreign markets, which can increase U.S. sales. In addition, foreign companies with loans in U.S. dollars find it less expensive to repay those loans, making such companies good candidates for diversifying portfolios and index annuities.

Of the international indices, the Hang Seng Index (HSI), which has recently been incorporated into several life products, is definitely one to watch. It is the main indicator of overall market performance in the Hong Kong market and represents about 65 percent of the capitalization of the Hong Kong Stock Exchange. Recently, Chinese mainland companies have been given a green light to participate in this prestigious index. The HSI has experienced steady growth over the past five years and appears capable of sustaining that growth over the long term.

A fixed index annuity tied to the HSI could offer the security of guaranteed interest and other benefits typically associated with this product while offering a substantial growth opportunity as the vast Chinese market becomes available to the rest of the world.

Blended indices
A blended index combines two or more indices and ascribes different crediting weights to each. For example, a strategy might blend a U.S.-based index with, say, the Dow Jones EuroStoxx 50, Europe’s leading blue-chip index for the Eurozone. The blend of these indices can offer spectacular diversification, encompassing not only the U.S. stocks, but also 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. An index blend such as this is a great way for your clients to move cautiously into a new market and diversify at the same time.

A rainbow-style strategy offers another example of the blended index concept. Such a strategy offers not only diversification, but also enables clients to take advantage of the best-performing index. A hypothetical strategy might blend the S&P 500, NASDAQ, and the Dow Jones Eurostoxx, and establish weighted averages up front — for example, 50 percent weight is allocated to the best-performing index, 30 percent to the middle, and 20 percent to the poorest performer. A client with this rainbow-style strategy achieves diversification, maximizes the return on the best-performing index, and minimizes exposure to the worst performer.

No sacrifice
The great thing about these international and blended fixed index annuities is that your clients sacrifice nothing. They retain all of the security and benefits of a typical S&P 500-based annuity, from guaranteed minimum interest and strong growth potential to quick access and limited penalty-free withdrawals. What they gain is even more security provided by an extra layer of diversity, and the growth potential of the global market. Be sure to check out these new products as they become available — your clients will thank you, and you’ll close sales.

Diane Shemi is director of product management for Legacy. She can be contacted at [email protected].

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