Indexed Annuities Hit Near Record Sales in Q2

In a release detailing the highlights of the sales results, Frank O’Connor, director of insurance solutions at Morningstar, pointed out that while VA sales in the first half of 2012 were 6% lower than in the first six months of 2011, they were nearly 12% higher than the same period in 2010, indicating “strengthening but leveling product demand.”

He went on to note that net cash flow declined 51% during the same period. “It is unclear yet if this was an anomalous period, or representative of a ‘new normal’ in cash flows as we see retirees begin to draw income from the $1.5 trillion in aggregate account balances,” O’Connor stated in the release.

Why Indexed Sales are on the Rise

In a recent interview with LifeHealthPro.com, Dana Pedersen, below right, vice president and product officer for Hartford, Conn.-based Phoenix Cos., said there is a definite shift toward indexed annuities for several reasons.

First, indexed annuities have undergone many product innovations that now make them a competitive alternative to variable annuities. Specifically, indexed annuities that now offer guaranteed living benefits, guaranteed death benefits and long-term care enhancements, noted Pedersen, who focuses on fixed indexed annuities.

“The level of guaranteed benefits that you can provide on an indexed annuity is certainly higher than you can provide on a VA, because on the variable you obviously have downside risk. So the level of guarantee has to be lower to hedge versus that risk from a cost perspective,” Pedersen said. “So I think the benefits are so compelling on the indexed side that producers have to take a look at the benefits that are being offered on these products.”

Further, these new products allow producers to tailor the benefits and riders to their client’s individual needs, Pedersen added.

Another factor behind the rising popularity of indexed annuities is that broker-dealers and banks are getting into the act. “Broker-dealers especially, and banks to a lesser extent, have been very hesitate to adopt indexed annuities probably because of the bad press associated with them in the past.” Pedersen said. “But when you actually look at the benefits provided by these products I think both broker-dealers and banks have realized they are doing their clients a disservice by not offering them these products.”

And with so many retirees and pre-retirees tired of dealing with the stock market mayhem of the past few years, consumers may prefer the guaranteed benefits offered in an indexed annuity versus the upside potential of the variable variety, said Pedersen. “While more upside potential may have been more palatable before the financial crisis, at this point, people have less to invest in annuities and they need to go to the product that is going to provide the highest level of guarantees.”