How to Sell the Right Index Annuities
January 9, 2010 by Sheryl J. Moore
- By Sheryl Moore
Even if you’ve never sold an index annuity, you’ve most certainly heard of fixed index annuities (FIAs). These increasingly popular products line the advertisements of financial services Web sites. Daily newswire services tout the hottest new FIA product to hit the street. If you are affiliated with an independent marketing organization (IMO), you can barely finish the contracting paperwork before they’re trying to give you the marketing kits for their favorite FIA picks.
Fixed index annuities have definitely become a mainstream insurance product in recent years. Perhaps an understanding of the basic product mechanics would help explain why that is the case. These fixed annuities provide a minimum guarantee (typically 87.5 percent of premium, credited at 3 percent interest). This is lower than a traditional fixed annuity (FA), but in exchange the client is given a higher potential for earnings based on the performance of an external index such as the S&P 500. Potential earnings are typically limited by a stated maximum participation rate or cap. Other designs may also apply an asset fee. (All three of these pricing levers are just different ways of limiting the interest credited to the product.) This is different from a variable annuity (VA), where the potential earnings are not limited by any sort of ceiling. However, unlike a VA, the index annuity always has a minimum guarantee, and in years where the external index has a negative return, the policyholder receives zero percent interest crediting instead of a negative adjustment to their cash value. So in short, with an FIA, you are giving some of your downside to have a chance for a little more upside.
The attraction to FIAs comes primarily from declining rates on traditional fixed savings instruments such as CDs and traditional fixed annuities. When rates on traditional FAs dropped to levels where first-year rates were around 4 percent, people began asking themselves if there was a better alternative. However, consumers’ sour stomachs for declines in securities products such as stocks and variable annuities also had them leery of losing their assets in the VA market. Index annuities were a natural solution for those who wanted the best of both worlds. The products are a safe money place with a higher potential than FAs.
Who can sell the product?
Today, all that is required to sell an index annuity is a valid insurance license. You do not have to be a registered representative to sell these products because they are not securities. While on the topic of regulation, however, it is important to note some recent turf issues on the securities status of this popular product. This is a fixed insurance product, and it is therefore regulated by state insurance divisions as opposed to the Securities and Exchange Commission (SEC). The National Association of Securities Dealers (NASD) is a self-regulatory organization that has no regulatory authority regarding the securities status of index annuities. However, they did issue the Notice to Members 05-50 in August 2005, suggesting that FIAs should be treated as securities by member firms. Furthermore, the NASD advised that broker-dealers supervise their registered representatives’ sales of index annuities, and consider creating “approved lists” of FIAs from which they can sell.
Despite the fact that the NASD had no regulatory authority, their suggestions were enough to change protocol for BDs. This means that if you are a registered representative, your BD may have additional guidelines for your sales of index annuities and may limit your sales of FIAs to a shorter list of products. Agents who are not registered have been able to conduct business as usual.
Now that you are prepared to sell, let’s talk about product. You’ve got 56 carriers offering 311 products for you to sell today. You have a choice of surrender charge durations ranging from one to 18 years. Premium bonuses are available in all varieties and amounts: 1 to 10 percent, payable up-front or 1 percent for every year of surrender charges, or even contingent upon annuitization. Street-level commissions can go all the way up to 13 percent on index annuities today. One would speculate that this may be why sales of the product line have steadily increased since their introduction. However, the average street-level commissions for all products was 7.01 percent as of the third quarter 2006. And if all of that wasn’t enough, there are 21 different crediting methods for your client to choose from. You can choose among many different indices, choose which pricing lever you are comfortable with (participation rate, cap, asset fee, etc.), and choose the method you desire. With so many different products on the market, you are sure to find something you feel comfortable with.
Nearly all products today offer 10 percent penalty-free withdrawals annually and the full account value upon death. Many products also offer additional benefits such as surrender charge waivers in the event of terminal illness, return of premium riders, or even guaranteed minimum death benefits (GMDBs). The latest development in the indexed annuity industry is the emergence of guaranteed lifetime withdrawal benefit (GLWB) riders — similar to those in the VA industry, which are intended to pay the client guaranteed lifetime income, regardless if the account value falls to zero. Product development in FIAs has much to offer agents and clients alike.
Do clients receive double-digit returns sometimes? Yes. On the other hand, they can get zeros just as often. The No.1 one rule of selling FIAs is don’t oversell the potential for the interest crediting, as it may not perform. This is a fixed annuity product, not a variable. To give yourself a realistic expectation of index annuity returns, they can be generally somewhere in the range of 2 to 3 percent higher interest than what a traditional fixed annuity is currently crediting. However, all that you should disclose to the client is the minimum (zero), maximum, and worst-case scenarios (minimum guarantee).
Satisfying the client
The most important thing in selling an index annuity sale is education. If you discuss the product in layman’s terms, the client will understand. Our research indicates that if you give consumers realistic expectations along with the basic product mechanics, they are open to the concept of FIAs over other traditional savings instruments. Overall, listen to your client’s needs and concerns. Find a product that not only addresses them, but is competitive and will not be open to replacement. Follow up with them annually to discuss policy performance.
Sheryl Moore is president and CEO of AnnuitySpecs.com, an index product resource. She has nearly a decade of experience working with index products and is formerly head of competitive intelligence for two key life and health insurers. For more information, email email@example.com.