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Life Health > Annuities > Fixed Annuities

What Always Goes Up in a Down Market?

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Back in 1990, Dr. Harry Markowitz won the Nobel Prize in economics for his work in asset allocation models in investment portfolios. It was the new era of Modern Portfolio Management, in spite of the work being created and published in 1952! Dr. Markowitz literally wrote the book on asset allocation and diversifying investment risk.  Bottom line, owning assets that act independently of each other is extremely worthy.

Investing one’s money into unrelated or better, non-correlated assets is paramount for true diversification. While Harry is considered the father of diversification, throughout the ages we have learned never to put all our eggs in a single basket, whether it is crops or stocks.

Unfortunately there is only one sure thing that increases or goes up in a bear market and that is “correlation.” Surely you saw for yourself how all assets, (even less risky bond funds) including real estate, got hammered in the mass hysteria of the financial collapse in 2008. There weren’t many places to hide safely, other than in cash equivalents or fixed type annuities. Since then, we’ve watched the 10 year treasury yield fall to never before lows; quelling the enthusiasm and returns on both indexed and fixed annuities

But for a safe haven and respite to wait out this bipolar bear market, what trumps the peace of mind of a regulated financial institution standing firm behind your money? Add to that a state guaranty fund backing up the institution for up to $250,000 per annuitant and owner and you’ve got the solution for many a peaceful night’s sleep. Quite a few newer products were introduced to the market after the 2008 debacle, and now you can find fixed products with short surrender fee schedules and several with no surrender charges and even 100% return of premium riders effective from day one at issue. 

Seeking hidden dangers

As Barry White sang, “Can’t get enough of your love, baby” – but too much of a good thing isn’t good. And piling money into a single asset type can be surprisingly costly, in more than ways than one. From all of the liquidity our government has infused to stimulate recovery, (TARP, QE 2 and 3, etc.) and with national debt swelling over $15 trillion, eventually interest rates will increase. 

Now’s the time to differentiate yourself and your practice by informing your clients and prospects of hidden dangers lurking in some fixed annuities. The rule of thumb for you and your product mix in 2012 will be to read the fine print on all of the products you recommend to your clients. Even some of the contracts you’ve used and loved for years may have a hidden snafu should your client need to trigger a rider or take out money from an annuity contract.

The little known MVA clause in many fixed and indexed contracts could give you and your client quite a startle if you’re caught unaware. Basically, this MVA or market value adjustment clause can reduce how much your client can actually take out of an annuity contract; in addition to any surrender fees remaining in a contract. You read that correctly, an MVA can actually increase the amount of surrender charges and cost to exit a fixed or indexed annuity. Basically, if interest rates rise to a level that is higher than what existed when the contract was issued, a market adjustment might trigger and reduce the client’s principal. One could lose money in a fixed annuity in excess of just surrender charges. It even says so in the contract.

Similar to owning a Treasury bond that doesn’t mature for several years, when interest rates rise, the “market value” of that full faith and U.S.A. credit-backed instrument will decrease. While Treasury bonds are ultimately considered to be “safe” worldwide, not being able to hold them to maturity could result in loss of as much as half one’s principle (hypothetically, even more). With that in mind, it’s best to have explained and understand this land mine before the situation or emergency withdrawal request arrives from your client. 

Not all fixed or indexed annuities have a MVA clause, but before you recommend that fixed annuity that appears to have a sweet five-year interest rate, check the fine print for an MVA. You’ll be very glad you did.