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Life Health > Annuities > Fixed Annuities

Annuity update: The changing landscape of FIAs

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For advisor Thomas B. Hamlin, the drought lasted about a decade. A strong proponent of equity indexed annuities back in the early and mid-1990s when they were still a relatively new product, Hamlin, CEO and founder of Somerset Wealth Strategies in Portland, Ore., says he largely stopped recommending indexed products to clients in the late 1990s and only recently has resumed doing so.

Avoiding indexed annuities, he explains, was a conscious decision made with his clients’ best interests in mind. “I didn’t use them much because they were the proverbial moving target. It seemed like they could change the rules on you any time. Lower caps, lower participation rates–it felt like you weren’t in complete control. Nothing personal against the insurance companies [that offer indexed annuities], but I just didn’t want to feel like my clients were being set up to fail.”

The drought ended for Hamlin and his firm in 2010, however. “We did more business with fixed indexed annuities last year than we had done in a decade,” he says. Recent improvements in the user-friendliness of the product–a moderation of fees, the advent of lifetime income guarantees, the availability of features that introduce new contractual flexibility, etc.–not only have rekindled Hamlin’s interest in indexed annuities, they also have helped spur a two-year surge in overall FIA sales.

On the heels of a record $29.4 billion in sales in 2009, fixed indexed deferred annuities hit record highs again in 2010, when sales climbed another 6 percent to an estimated $31.4 billion, according to figures released in March by Beacon Research. Last year, FIAs also claimed their largest share of total annual fixed annuity sales in the eight years Beacon has been tracking the market–48 percent.

Shorter surrender periods, richer lifetime income guarantees, lower fees and, of course, the combination of principal protection on the downside and positive market participation on the upside. These are some of the reasons advisors such as Hamlin are recommending and selling more FIAs these days. Here’s a closer look at how to leverage those key selling points to generate new business with fixed indexed annuities:

Selling point: Flexibility

Many FIAs now come with shorter surrender periods (five years instead of seven or 10). Many others don’t require annuitization to start taking income. Some offer a walkaway option (often after five or six years). These are the kinds of features that make FIAs more appealing to investors who prefer not to have their assets tied up for longer periods, so they have greater wherewithal to adjust to changing conditions, such as fluctuations in interest rates, inflation, etc.

Greater flexibility also comes via features such as those that give contract-holders the ability to defer taking income from their FIA, to convert a deferred FIA into a single-premium immediate annuity and
to access additional contract resources specifically to cover health care/long-term care costs through
options such as an income doubler. Today’s generation of FIAs also gives investors more choices regarding the equity indices to which their moneys linked.

Those types of features “make the [FIA] products out there today much more user-friendly,” says
Nolan Baker, CSA, an advisor at Retirement Specialists of Northwest Ohio.

Selling point: Guaranteed lifetime income

Now indexed annuity owners have access to the same guaranteed lifetime withdrawal riders that were once available only to variable annuity investors. The pairing of income guarantees with FIAs has contributed to the recent surge in indexed annuity sales, observes Hamlin, noting that about half of the indexed annuity purchases he orchestrates for clients now include a lifetime withdrawal benefit.

“People want insurance instead of just assurance. That’s why having a lifetime withdrawal benefit is great within a fixed indexed annuity. It’s a guaranteed income provider. It gives someone who’s now 55 and planning to retire at 65 the certainty that the income will be there in 10 years when they retire.”

Selling point: Value

An ongoing influx of new players in the fixed index annuity marketplace means greater competition for the investment dollar. And that appears to be translating into lower overall FIA fees for investors, which bodes well for clients, according to advisors such as Baker and Hamlin. “We’re talking about advisors working for a more reasonable price [with lower FIA commissions], and clients getting more value for their investment,” Hamlin explains.

It’s also worth noting that the lifetime income guarantees offered with FIAs often cost substantially less than similar optional guarantees available with variable annuities.

Selling point: Downside protection

The principal protection offered by FIAs resonates loudest with investors who are nearing retirement and thus can’t afford to leave their nest egg vulnerable to another sharp market downturn. It’s not hard convincing people whose assets have been diminished by two major market declines in less than 15 years of the merits of having a solid floor underneath their annuity assets, says Baker. “These are people who don’t have the luxury of time to make up for drastic declines in the market. For them, the fixed indexed annuity becomes what I call a circuit-breaker on their financial house.”

For clients approaching retirement, FIAs represent “a way to get safer and simpler with their money,” Baker explains. In particular, he says, a client who’s approaching retirement, and who lately has seen the value of his equity investments climb sharply with the stock market rebound, might be wise to “take some of the money they have made and move at least a portion of it into something like a fixed index annuity to protect it.”

Here’s where an FIA can work in tandem with a variable annuity. Clients who invest in an indexed
annuity for downside protection (and, perhaps, to secure a guarantee of lifetime income) might also want to maintain the ability to fully participate in the positive movements of the stock market, at least with a chunk of their money.

Selling point: Upside potential

Some clients are content to have limited participation in upside movements of the market, especially if they’re getting a contract that guarantees them a respectable return on their investment over time, as many FIAs do. For people who are preparing to retire, an FIA with an 8 percent guaranteed rate of return can look pretty appealing.

In those kinds of cases, Hamlin positions the FIA as what amounts to a deferred immediate annuity solution, they invest in an indexed annuity now, build value in the contract over the period of seven to 10 years, then start getting income from the contract once they retire.

“It’s not unfettered upside. It’s capped,” he notes. “And it’s not going to provide a dividend. But as long as people understand what they’re getting involved with, and you don’t lead them to believe [the FIA] is something it’s not, it’s a good option for a portion of their money.”


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