If the definition of insanity is continuing to do the same thing over and over and expecting different results, then Einstein would have to challenge the hypothesis today of many indexed annuity (FIA) and indexed life sales (IUL) agents.
After $39 billion of FIA sales this past year and much of the $100 billion in sales the last five years linked to the performance of the Standard and Poor’s 500, according to Annuity Specs, it appears that many agents are either selling past performance, don’t care or believe in diversification, or don’t understand current U.S. equity valuations.
Sure, the consumer understands the Dow and S&P 500 better than many other indices, but let’s face it, the agent who allocates the client’s entire indexed annuity premium to the S&P 500 or Dow is ignoring the scoreboard in a big way. Right now agents who are linking their clients to the major indices are similar to clients who shop at Nordstrom’s or Macy’s for a $60 shirt that could be bought at TJ Maxx or Ross for $30.
According to Zacks Investment Research and Robert Shiller, the author of “Irrational Exuberance” and the predictor of the 2001 tech wreck, the markets’ valuation on an inflation-adjusted basis for the last 10 years predicts the possibility of a -1.4 percent return for the next 10 years.
Shiller’s analysis, which dates back to 1881 market data, shows the market overvalued, even after the recent decline, by 54 percent. After subtracting 2 percent margins from indexed annuity gross margins, there are a lot of zero percent returns for the next decade. If zero is a hero for savers who salivate at .50 percent CD returns, then all is well.
Even Sacks, which utilizes non-inflation-adjusted earnings multiples, shows the potential for a measly 5 percent gross return for the next 10 years. Both of these should provide relief for a client who is concerned with a market crash, but they also suggest that index returns could be on the low end of the historical 2 percent to 6 percent returns of indexed annuities and indexed universal life insurance that Annuity Specs publishes. The conservation of principal and the potential for increasing lifetime income means that indexed annuities and indexed life as a fixed income alternative still make sense. These primary benefits are still reasons to own FIAs as an alternative asset class.
The potential and probability for lower returns than the last five years, however, are siren calls to agents to look elsewhere for indices and crediting strategies that consider alternative crediting methods and indices. Consider options from the many companies that offer blended indices or crediting indices that include the Hang Seng, Gold or International like the MSCI Index. These markets are all selling far below the United States in terms of valuations and therefore offer the potential for greater crediting gains going forward.
For instance, the Hang Seng (China) sells at a valuation roughly 50 percent of the United States and is the cheapest it has been in 10 years, offering a compelling allocation for some of your indexed annuity/life money. In addition, consider that volatility in the U.S. has been more tepid than any time over the last five years, and as volatility increases (as measured by the VIX), monthly crediting strategies should outperform annual point to point or term crediting methods.
A market downturn always presents a great time to reflect and reconsider. Now is the time agents should review these options. These two minor changes can make a big difference going forward, so I urge you to review your clients’ index annuity and indexed life crediting options periodically.
Don’t be like the little old lady I knew selling pretzels year after year at 25 cents on the street corner. I consistently would drop 25 cents in her can and make eye contact without taking a pretzel. After five years, the lady stopped me and said, “Sir, I appreciate your business and you are one of my best customers, but you need to know something. Our pretzel price has increased to 35 cents.”
The U.S. markets have gone up more than 140 percent for the last five years, yet indexed annuity and life agents, in many cases, are still allocating clients’ index crediting based on 2009 prices. It is time to take notice and perform an annual review before inflation erodes the price of your clients’ cash surrender values by 33 percent on a string of potential zero returns.