Letters

In response to “A FIA or a VA does not = SPIA”

I am not at all sure that an agent who recommends a deferred indexed annuity with an income rider, to be activated in year one, is doing anyone a disservice. And I don’t see why you would assume that to be the case. Have you considered the following scenario?

Client buys an indexed annuity (IA) with a 5 percent GLWB and a 10-year surrender charge period. Client takes 5 percent of the initial value each year for 10 years. During that 10-year period, the IA earns 5 percent per year, over and above the rider charge (i.e.; roughly 6 percent per year growth). At the end of the tenth year, the contract value is equal to the original investment and the surrender charge period has expired. The contract can now be annuitized or the contract can be exchanged for a SPIA. The annuity payment for that SPIA will almost certainly be greater than if that client had bought a SPIA initially (I say “almost certainly” because it’s possible that annuity payout rates, 10 years hence, will decline by more than the increase in payout attributable to the client being 10 years older). Of course, there’s no assurance that an index annuity will produce that level of growth, but there’s no assurance that it won’t, either. But the client will, under this scenario, have access to the IA account value. I could be missing something, of course. If so, I welcome your pointing it out.
John L. Olsen, CLU, ChFC, AEP

John. Your scenario looks good if the annuity would perform like that year after year after year after year…but markets don’t work like that as we know. All of my proposals I run at zero percent return on the accumulation value side because I think you should own an annuity for the contractual guarantees only, not projected returns. Buy the reality, not the dream. The example you gave (earning 5 percent per year) is exactly how it’s presented by agents, but seems to never work out that way, so why even present that as a possibility? Client expectations seem to be always out of whack when they tell me what they believe they have purchased or are being pitched. At these current interest rate levels, which translates to lower IA realistic returns, I think to run any scenario at 5 percent annual growth is misleading to the client. If the planets align themselves perfectly, then maybe an IA works under that scenario. I just live by what I always tell clients: “Own an annuity for what it will do (contractual guarantees), not what it might do (projected returns).” That’s limiting from a sizzle selling standpoint, but it’s how I believe the products should be sold and owned—as pure transfer of risk strategies. I think both of us have good arguments, but I find that most agents never even consider SPIAs as a recommendation, which is tragic. Thanks as always for your insightful comments.
Stan Haithcock