The ins and outs of indexed products
July 8, 2011 by Charles K. Hirsch
Michael Earle Gray Jr., president, MEG Financial Inc., has 17 years of life and disability
insurance experience and is a licensed resident life and health agent in
Florida and licensed non-resident agent in 49 other states and the District of
Columbia. He has devoted his entire career to the insurance and financial
services profession with specific emphasis on life and disability insurance.
Gray has assisted thousands of individuals and businesses on a nationwide
basis. Primary areas of expertise include term life insurance, universal life
insurance, in-force policy reviews, insurance for tough health risks, business life
insurance including key man insurance, business succession planning, disability
income insurance and estate planning. Gray has been a member of the MDRT for
seven years, receiving several Court of the Table distinctions.
Adam Hyers is the owner of Hyers and Associates Inc., a life and health insurance agency
serving consumers and agents across the United States. Fixed, indexed and
immediate annuity education and sales are a primary focus of his agency, and he
has written several articles to help agents and consumers better understand
what to expect from annuity contracts. Visit his Web site at
www.ohioinsureplan.com or contact him at firstname.lastname@example.org.
Russell A. Smith, CLU, ChFC, CFP, CSA, entered the life insurance business in 1982. A consistent Top 10 producer, Smith continues to set the pace for his small group
of agents. His practice places emphasis on estate and retirement planning for
seniors. He is a Life and Qualifying member of the MDRT, as well as a current
Court of the Table and Top of the Table member for 14 consecutive years. He has
earned both the National Quality Award and National Sales Achievement Award. A
devoted industry supporter, Smith is past president of the Riverside County
Association of Life Underwriters, was president of NAIFA-California for
2001-2002, has led several NAIFA Committees, and served four years on the NAIFA
National Board as one of the 10 elected trustees.
One thing good producers like to hear about is what kinds of products other good producers say are doing well. I’m not suggesting that there’s a herd mentality in this business, but there’s no doubt that when a product starts to gain a little sales traction,
other producers start paying attention. A little bit of sales traction can turn
into real momentum.
That is exactly what we’re observing right now with indexed products — both indexed annuities and indexed life products. A lot of good producers are finding that these products
are resonating with more and more clients, so of course, more and more producers
are taking a closer look at what the products offer.
To get an idea of how and why these products are working so effectively right now, we posed our questions this month to a panel made up of some of the more successful indexed
product producers: Michael Earle Gray Jr.; Adam M. Hyers; and Russell A. Smith,
CLU, ChFC, CFP, CSA.
Charles K. Hirsch, CLU: Can you talk a little bit about how and when you decided to make indexed products a part of your product offerings to your clients?
Michael Earle Gray Jr.: In my business, we constantly look for niches where we can provide innovative and value-oriented solutions to a specific group or class of client.
When reviewing our opportunities, we uncovered indexed life insurance as a
great fit for several of these niches. We have found indexed life is a very
flexible tool for business owners, highly compensated executives and
professionals, such as physicians. Incidentally, we currently are life and
disability insurance specialists and do not write a significant amount of
Adam M. Hyers:
I’ve been offering indexed products for nearly a decade. When I first began
working in the insurance industry, I worked almost exclusively in the senior
market, offering long-term care insurance (LTCI). As I branched out to the
annuity marketplace, I quickly saw the benefits of indexed accounts. Those
clients who considered purchasing LTCI are oftentimes conservative in nature
and are already of the mindset that asset protection and preservation are an
important part of any financial plan.
Russell A. Smith, CLU, ChFC, CFP, CSA: I have been offering indexed annuity products to my clients since 1994, when I first became aware of them. There was a brief
period from 1998 to 2000 when I was not as enamored with the products available
due to pricing issues at the carrier level and what I determined was a lack of
competitiveness versus some of the variable annuity products and features
available. This changed for me in about 2001, and we have been heavily
promoting indexed products since.
Hirsch: When you look at the range of indexed products today — indexed annuities, indexed universal life, etc. — where do you feel there is the most untapped potential for producers and their clients and why? In other words, is there a type of indexed product that you feel is being undersold?
Hyers: I’m of the opinion that multi-pay and single premium indexed life insurance policies are somewhat underutilized. The tax advantages and growth opportunities associated with indexed life offer financial opportunities that can far surpass bank savings
instruments as well as some annuity policies. Seniors especially can use these
instruments to transfer wealth much more efficiently than a certificate of deposit
or a fixed annuity.
Indexed life insurance spreads, caps and participation rates tend to be more favorable for consumers than most indexed annuity accounts. I don’t believe that agents are reluctant
to offer such plans, but in this age of industry warfare, unfortunately, there
seems to be a disconnect with the consumer when it comes to wealth transfer
using life insurance products.
Smith: My client focus is on seniors, so the majority of my product sales are fixed indexed annuities (FIAs). I believe there is still huge potential in this market, as the baby
boomers are entering their retirement years and they need to have a serious
plan so as not to run out of money. It is my belief that a strategy using
primarily FIAs is the best approach to safeguard against loss of their
retirement nest egg due to the downside protection feature inherent in most FIA
Gray: When considering the volatility of the equity markets over the last 10-plus years and the current state of our economy, many people are just not comfortable with their
investment portfolios and the uncertainty of future returns. Indexed products
provide for downside protection of cash values with the potential for
significantly higher returns — index credits — than a typical fixed account. With
indexed life, the dual benefits of death protection and the potential for
significant cash accumulation without the risk associated with equities is
Hirsch: Whether it’s an indexed annuity or an indexed life product, is
there a particular kind of prospect who you feel is more receptive to seriously
considering an indexed product? If so, what does that prospect look like
Smith: Absolutely! Anyone who has seen the ups and downs of the market in recent history, has watched the fluctuation of his or her own 401(k), has experienced any sort of market loss, or is simply risk-averse can benefit by using an FIA approach. I would say the
prospect that I look for is age 50-plus, retired or nearing retirement, has a
significant IRA or 401(k) that he or she wants to protect or has experienced
any of the aforementioned concerns.
Gray: We find that equity indexed life insurance policies are definitely not for everyone. In fact, the best prospects are those who can fund the policies to the maximum level and
leverage the cash accumulation aspects of the policy. Typically, we look for
prospects who have a need for life insurance and are already maxing out their
existing retirement accounts, but still have significant disposable income. The
ideal prospects are usually business owners, executives and white-collar
professionals between the ages of 30 and 55.
Hyers: I hate to generalize too much, as I’ve had inquiries about indexed products from all types of consumers — men and women both young and old as well as those who are accumulating wealth and those who are already wealthy. However, most prospective clients seem to be men at or near retirement who have been caught off-guard a couple of times by the most recent episodes of market volatility. Most often, these are people who
are conservative in nature and who were or are invested in variable instruments
that were too volatile and too risky to provide enough financial peace of mind.
Hirsch: Can you briefly share with us an approach or a presentation you
have used recently with indexed products — either an indexed annuity or an
indexed life product — that you have found to be particularly effective in
capturing the prospect’s attention?
Gray: Supplemental retirement income is a chief reason why most prospects choose to buy indexed life insurance. In these cases, I like to focus on the internal rate of return on
the cash values over time. Using a conservative interest crediting rate,
usually 7%, we can generally show a 5% internal rate of return on premiums over
a 10- to 12-year period of time. I also show income at age 65 that includes
taking withdrawals and loans that can be accessed tax-free if designed
properly. And let’s not forget the life insurance, which is an added bonus.
Hyers: There are some good pieces out there from a couple of indexed providers — both annuity and life — that illustrate the historical returns of the product itself. At the end of the day, you still need to be able to show positive growth of more than a couple of
percentage points. After — or during — the discussion of a client’s needs and
risk tolerance, I like to show returns so that my clients know they are not
burying their money in a coffee can in the back yard.
I also like to illustrate income riders when meeting with prospective clients as well. An
income rider attached to an indexed annuity can reassure someone who is
planning toward retirement, but who also wants to account for a reliable stream
of income in the future. With many prospective clients, the numbers do matter.
It’s helpful to be able to show them what they can expect from their policies.
Smith: Actual results that can be shared with prospective clients have been the best approach for me. Given that we have been offering these products since they were created means we have a rich library of data that we can pull from to show real examples of what has occurred in both good and bad markets. I can show a prospect a variety of
actual client statements — redacted of course — to show actual performance.
Showing a prospect a statement with a zero return doesn’t sound too enticing until you contrast that to a market-driven investment in the same time period with a negative 10%, 20%, 30% or even 50% return. The principal protection feature of an FIA really
shines in this situation. Of course, showing a client a positive 10%, 20% or
even 30% annualized return has a lot of sizzle, and we are able to do that as
well. Downside protection and upside participation is the focus we use.
Hirsch: Any further thoughts?
Smith: Indexed products are here to stay and can provide clients with significant peace of mind in these financially turbulent times. The variety of products continues to grow, and
they consistently are becoming more and more “user friendly.” There are very
few occasions when an FIA is not at least a piece of a financial plan that I
Gray: One major point that I always stress to my prospects is realistic expectations. Indexed life is not the end-all solution to everyone’s life insurance and retirement income needs. When illustrating index life, I try to be conservative. While this may diminish
some of the “sizzle,” I have found that ultimately my clients have a firm
understanding of how index life works and are extremely happy over the long
Charles K. Hirsch, CLU, is a contributing editor to Life Insurance Selling. He is the president of Hirsch Communications Consulting LLC, in Florissant, Mo.