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.