Keeping Index Life Out Of Hot Water
January 9, 2010 by Sheryl J. Moore
- By SHERYL MOORE
The index annuity market has some lessons for insurance companies and advisors who are now expanding into sale of index life insurance.
Those lessons are rooted in the many challenges that index annuities have faced from their early years on to today.
It’s no secret that index annuities have had their share of woes. In the last 3 years, much of the hullabaloo has centered on their securities status. Even the Financial Industry Regulatory Authority (formerly the NASD) has weighed in.
Those familiar with the market argue that the products are fixed annuities, not securities. They reference the definition provided by Safe Harbor Rule 151 of the Securities Act of 1933, which indicates that an annuity is an insurance product rather than a security, as long as it conforms to the 3 three criteria shown in the chart.
The third criterion is the one that gets some proponents of regulating index annuities as securities hung up. Why?
When the index annuity market first emerged in 1995, insurance carriers and agents alike had never seen a product that could offer downside guarantees coupled with the potential for upside interest crediting based on an external index like the S&P 500. It’s just too bad that so many focused on that upside potential, more than the downside guarantees. Many compared the products to variable annuities and the index itself.
As a result, index annuity marketing seemed to become more like that for investments than for insurance products. It was not altogether unusual to see index annuity advertisements promising “stock market-like gains” and “all the upside, none of the risk!” This was reinforced by the tendency of carriers to call their new products equity index annuities—not index annuities or fixed index annuities as is the case today. (Eventually, the word “equity” was dropped, in order to emphasize that this is not an equity or securities product.)
Long story short: Index annuities got into a lot of hot water because of the industry’s heavy focus on the upside.
In recent years, however, the index annuity industry has steadily been cleaning up its image. Many insurance carriers are requiring suitability forms in all states, for example. Some are requiring the forms for clients of all ages, not just seniors. Also, many marketing materials have been revised to explain clearly the benefits of the products. In addition, some carriers now require their distributors to pass training courses on their index annuity portfolio, before they can sell the index products.
This has been a learning curve that the now-mature index annuity market had to undergo the hard way. What is the takeaway for the index life market?
First, ensure that the index life products are properly understood. These are fixed insurance products, not securities. For example, index life is not like variable life with a minimum guarantee.
Consumers and agents alike should have a firm comprehension of the product basics: the minimum guarantees, the maximum potential for interest crediting—not to mention the death benefit option, face amount and other contractual provisions.
Giving agents proper and thorough training will help ensure that the consumer has the opportunity to receive the full message as well. That should help keep back-end complaints to a minimum and persistency as high as possible.
Next, use responsible advertising and publicizing. Don’t just take a marketing piece and “run with it,” without submitting it for independent review or consumer testing. Advisors should be sure to submit their advertising to the carriers, who are responsible for oversight of agent and marketing organization advertising. Obtaining such review does take time, but it also helps ensure that the material is not only in compliance, but is a responsible and clear description of the contract itself.
Last, it is crucial not to give unrealistic expectations of product performance. This can be difficult in a world where product illustrations are often used for competitive purposes to sell “the best policy.” Too often, people overlook disclaimers that warn that “illustrated values are projected, not guaranteed” and “past performance [of an index] is no indication of future results.” Furthermore, with any interest-sensitive product, the illustration on the day of policy issue will never come to fruition, since premiums change, interest rates change, withdrawals and loans are taken, etc.
So, although some index life carriers are illustrating policy values as high as 10.20% today, it may not be responsible to promise double-digit returns each year.
The lesson learned from the index annuity journey is to explain the index product accurately, give realistic expectations of returns, and stay in compliance with advertising. This should help keep index life out of all of the “hot water” that index annuities have faced.
Sheryl Moore is president and CEO of AnnuitySpecs.com, an index product resource in Des Moines, Iowa. Her email address is email@example.com.