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Portfolio > Economy & Markets > Fixed Income

A FIA or a VA does not = SPIA

By Stan Haithcock

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I glanced up from my computer screen the other day and I swear I saw Dwight D. Eisenhower standing in my office wearing his military uniform. He was holding a sign that said, “I might be dead but my interest rates are alive and well.” I know, I need more sleep.

Yes, the 10-year Treasury is at the same level as if old Dwight was still in the building, and these low rates are driving insurance companies crazy and pushing some agents into “justifying” unsuitable recommendations for immediate income needs. The phrase, “You don’t want to lock in rates at these levels” is perpetuating the improper sales of deferred annuities for income now instead of the no-brainer SPIA solution.

Spare me the argument that you shouldn’t lock in a Single Premium Immediate Annuity (SPIA) at these rate levels. None of us know what direction interest rates are going, and if you are one of the many that cavalierly say that they “have to go up,” then I have one word for you: Japan. Japan has been at a “flat line” with their interest rates for a very long time. 

Yes, interest rates could actually go down from these levels, and there is no historical data that reflects the monthly printing of $80 billion per month by our friend Ben at the Fed. And now that Japan has joined in the monthly printing party, all bets are off on guessing where interest rates are going to go. There is no past “tick data” on what’s happening now to support any historically based prediction or recommendation. It’s all one big guess.

Spare me the other argument that you are going to recommend a variable annuity (VA) or fixed indexed annuity (FIA) with an income rider and turn on the income stream immediately for “flexibility” or “growth potential.” Good luck with that argument at an arbitration if someone like John Olsen (author of The Advisor’s Guide To Annuities) shows up as an expert witness (which he does a lot of), and you are trying to convince everyone that taking 2 percent less than a SPIA in an actuarial payout is in the best interest of the client. Game over, case closed, write the check, lose your license. John, or any other expert witness, will filet you like a flounder because there is no suitable and appropriate leg to stand on for this recommendation.

A recent call

Recently, a nice lady called me to review and hopefully “validate” an annuity she just purchased a few months ago. She had $200,000 to her name and needed the highest lifetime income possible, as soon as possible. So, of course, I asked her what immediate annuity did she buy. She didn’t! She bought a fixed indexed annuity with an income rider and was advised to turn it on immediately! Huh? That was malpractice on the agent’s part, and that coming complaint is indefensible and ridiculous, and should cost the agent his or her license.

Our friends in the broker-dealer (BD) world are the primary culprits of what I call HCII or “Highest Commission Immediate Income” strategy using the ever-so-popular, loaded variable annuity. In this recommendation, the dream of the market upside is somehow combined with immediate income needs. In no mathematical or past market scenario do the numbers work in the client’s favor, and normally, the allure of potential “flexibility” is the only way a client can be convinced into locking in a much lower actuarial payout. The flexibility argument is a non-starter and only benefits the agent or advisor. If you don’t believe me, run this scenario past any legitimate compliance person and see what they say.

Agents and BD advisors need to hold their noses at these low interest rates and understand that Single Premium Immediate Annuities are still the only suitable and appropriate solution for income-now needs. Yes, the commissions are lower and the SPIA strategy needs to be explained in detail (good and bad) to make sure that it is appropriate. 

It’s important to understand that there is no justification to try to “fit” a VA or FIA square peg into a SPIA round hole. FMOs that promote only deferred strategies are also to blame because most don’t even have SPIA recommendations within their product platform. Talk about litigation exposure! These “one size fits all” FMOs need to wake up and smell the suitability coffee.

As an industry, agents and advisors need to get used to lower commissions and simpler product design solutions. Both are going to happen whether you like it or not, and will be demanded by the consumer in the very near future. Embracing Single Premium Immediate Annuities as the only solution for immediate income might be the first step to the industry reaching this eventual finish line.

So when the obvious client solution for immediate income is a SPIA, resist the temptation to “justify” using a VA or FIA.  If you don’t, you might get paid now, but you probably will pay a lot for it later.

For more from Stan Haithcock, see:

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