Now that we’re in 2017, the forecast for the future of annuities remains hazy—rather than an uncertainty that is driven by new product innovations, this fog is generated almost entirely by new regulatory changes. Importantly, the future of the Department of Labor (DOL) fiduciary rule remains uncertain under the new administration, but it is also entirely possible that the time for initial compliance will have come and gone before the rule can be repealed.
Many carriers have already begun taking steps to comply with the fiduciary rule, embracing fixed indexed annuities as a solution to their compliance problems because slowly rising interest rates and optional riders can make the products more valuable than ever for clients—so while there is much that cannot be predicted, fixed indexed annuities are likely to continue to dominate the marketplace for 2017.
Indexed Annuities Current Appeal, and a Simpler Future?
Following the finalization of the DOL fiduciary rule, fixed indexed annuities continue to be some of the most popular products on the market—in fact, LIMRA reports show that indexed annuity sales grew at a record pace in the third quarter of 2016. If interest rates continue to rise in 2017, it’s likely that these products will continue to grow and provide even more value to clients.
However, it will be more important than ever that advisors understand and clearly explain the many complicated features of these products as they begin to comply with the DOL fiduciary rule.
This includes understanding how a client’s participation in investment gains from the index to which the annuity is linked may be limited by spreads or participation caps, and other fees that may be associated with the product. This also includes knowledge of how changes in the relevant index impact the client’s individual account—i.e., how interest is credited to the account value. The method that is in the client’s best interests will depend upon the individual client’s tolerance for risk.
The need to explain the many complexities of an indexed annuity may mean that the industry will see a trend toward simplification of these products in order to provide greater clarity and lessen the risk of running afoul of the fiduciary standard.
Indexed annuities are also appealing because they allow the client to customize the product to his or her own specific needs, making it more likely that the annuity will add value to the client’s retirement income package and more likely that the advisor will satisfy the DOL fiduciary rule best interests standard.
The trend of insurance carriers exiting the traditional long-term care insurance market has continued throughout 2016, driven by a basic lack of consumer demand stemming from increases in the premium costs associated with long-term care policies (even the premiums on in-force policies have been increased in many cases)—meaning that clients will more often look to package a long-term care rider into his or her annuity in order to gain coverage.
The primary appeal of these “hybrid” products is that they eliminate the risk that the client will never require long-term care coverage; a fixed indexed annuity/long-term care hybrid will provide a standard annuity payout to the contract beneficiaries even if the long-term care feature is never accessed.
Typically, the value of the long-term care benefits that will be available to a client under an annuity with long-term care coverage is based on a percentage of his or her initial premium investment (usually 200 or 300 percent of the client’s investment).
The client can also choose to purchase inflation protection, which ensures that the contract value grows at a rate that is designed to keep pace with the rising costs of long-term care. The cost of the product will also be impacted by how long the client wants the long-term care coverage to last.
Because long-term care remains one of the largest expenses that a client is likely to face during retirement, these hybrid policies add value and protection that can often justify the cost of the product when evaluating whether the sale is in the client’s best interests.
Guaranteed lifetime withdrawal benefit (GLWB) riders are another class of rider that can add value to indexed annuities to ensure the client’s needs are met. GLWBs guarantee that the client will be able to withdraw a certain percentage of the value of his or her benefit base, which has been growing by a guaranteed amount over the course of the annuity’s deferral period (the guarantee is commonly somewhere between 4 and 8 percent) for the client’s lifetime.
While the annuity itself provides a guaranteed growth rate, it also ties the level of growth to the performance of one or more stock index. While this allows the client to participate in market gains, insurers carriers cap the return a client can receive in order to offer guaranteed benefits regardless of any market downturns.
When a GLWB is combined with an indexed annuity product, the client may be able to maximize the level of income he or she can draw from the product package—with a lower premium payment rate than what might be required when a GLWB is paired with a different type of annuity.
One thing that is clear going into 2017 is that many carriers are simply uncertain as to what will happen under the new administration. However, fear of violating the fiduciary rule has already led advisors to begin compliance efforts, and valuable fixed indexed annuities can provide a solution for many clients.
See these additional blog postings by Professors Bloink and Byrnes:
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
To find out more, visit http://www.TaxFactsOnline