Index products have become a welcome option at a time when persistently low interest rates continue to challenge cash accumulation opportunities, according to Charlie Gipple, national director of index products at Genworth (below right). That’s because index products provide clients with an opportunity to receive index-linked interest, potentially capitalizing on the upside of the market without the downside risk.
As clients experience flashbacks to 2008 — and even the early 2000s — Gipple says it’s no wonder even risk-tolerant customers are still relatively hesitant about reentering the market. So, between fear of market fluctuation and confusion over the multitude of life insurance and annuity options, consumers are in need of professional guidance now more than ever. In the following Q&A, Gipple addresses the origins of index products, offers advice on educating clients, answers “why now?” and more.
What was the impetus for creating index products?
It began in 1994, the year Fortune magazine dubbed the “Great Bond Massacre.” The market ended on a down note, and consumers realized the perceived safety of bonds wasn’t a sure thing. Additionally, interest rates had fallen steadily since the early ‘80s. Insurance companies recognized an opportunity to provide products that benefit from a strong market — and thus provide more upside than traditional fixed products — while at the same time, eliminate downside market exposure. In 1995, they developed index annuities, followed by index UL in 1997. With the introduction of these products, consumers finally had options that allowed them to safely build value without the risk of losing their principal solely because of market downturns. The environment that was the genesis of these products is eerily similar to the environment we find ourselves in today.
Despite being nearly 20 years old, index products are still a source of confusion for consumers. To what can you attribute this and how can advisors provide a simple explanation of what these products do?
Perhaps one of the most important roles advisors and agents play is that of financial educator. While some clients have a firm grip on FIAs and index UL, others may only think they understand, and many are in the dark. In fact, a recent study found that 55 percent1 of consumers do not know that UL accumulates cash value against which they can borrow. The same study revealed that 69 percent of consumers do not know that life insurance benefits are income tax-free. Further, with so many different types of annuities — from fixed to index to variable — it’s easy to understand why clients may be confused.
With this in mind, it’s important to remember that every client meeting is an opportunity to educate. You can help demystify index products by explaining that they offer potentially greater policy or contract value than other fixed insurance products and protection from downturns in the market, as well as other benefits.
Index UL, for example, provides a death benefit for heirs that is generally income tax-free, and with sufficient policy values, clients can take policy loans and withdrawals to supplement their income.2 Some index UL products also offer a rider, at an additional cost, that allows the policyholder to access the death benefit to pay for long-term care expenses.
Index annuity products offer tax-deferred accumulation, a guaranteed minimum interest rate for the fixed crediting strategies, the potential for greater growth through index crediting strategies and, like all annuities, the ability to create a guaranteed lifetime income stream. Many fixed index annuities offer clients an optional rider, usually for an additional cost, that guarantees a minimum guaranteed lifetime withdrawal benefit. For clients who are close to retirement and want to take some market risk out of their retirement portfolio, they may be able to move a portion of their funds from a 401(k) into an individual retirement arrangement that includes a vehicle like a fixed index annuity (FIA).
In response to producers’ requests for more educational resources about index products, Genworth recently launched The Index Institute, a virtual learning community for producers that contains index life insurance and index annuity training, market insights, presentations, product information and cutting-edge sales ideas.
Why should advisors recommend index products now?
There are three compelling reasons to recommend index products today: demand, market opportunity and the current economic environment. Advisors who seize opportunities to educate consumers about index products see significant demand and are reaping the benefits. 2012 marked the fifth consecutive year of record-breaking sales for FIAs3, which topped $33.9 billion for the year4. What’s more, 47 percent of all fixed annuities are fixed index annuities4. Index UL has seen similar success; sales increased 42 percent between 2011 and 20125. Since 2006, the product has had a compounded growth rate of roughly 30 percent each year5.
You might be concerned that the steady growth in sales suggests saturation. However, the reality is advisors have been primarily targeting the mass affluent, leaving Main Street underserved. Consumers making between $50,000 and $250,000 annually also have retirement income needs and other expenses to meet down the line. For example, a client with index UL would be able to more easily make contributions to her grandchild’s college education by drawing from the growing cash value of her policy. Additionally, with an accelerated benefit rider, available for an additional cost, policyholders can access their death benefit to pay for long-term care expenses.
The current economic climate is the perfect time to introduce clients to this type of product. It is the perfect storm for index products. FIAs, for example, are the answer many consumers are looking for but don’t know exist. They are capable of doing what fixed annuities and variable annuities can’t, given such low interest rates today: provide opportunity for growth while eliminating the losses associated with uncertain financial markets. If a client purchases an index annuity in 2013 and the S&P 500 is down in 2014, the client’s annuity will not lose value; it will simply earn zero interest that year. While past performance is not indicative of future results, considering the market is typically down one out of three years, FIAs are an incredibly attractive option for consumers.
What role should these products play in a larger retirement/financial plan?
There is a shift occurring today, with many people expecting the bond market to remain soft at best. There is a concern about what rising interest rates will do to bond prices or bond mutual funds. As clients consider where to reallocate — or supplement — this fixed income, FIAs are a smart alternative for bonds. They have a track record of strong performance and eliminate the downside of the market while, at the same time, have the ability to provide interest beyond the current yields of bonds. As such, FIAs are a logical addition to the fixed income portion of a client’s asset allocation plan.
See also: FIAs and the interest rate challenge
Index ULs provide clients with a death benefit while building policy value that can generate tax-free supplemental income later in life. This income can be used for anything, including funding college tuition, retirement and medical expenses.