Indexed Annuities: Back to the Basics
July 31, 2012 by Sheryl J. Moore
For years, indexed annuities have provided a strong value proposition to those saving for retirement: guaranteed safety of principal while having the ability to earn limited interest based off of the performance of a stock market index. This must appeal to at least a few people; the insurance industry has experienced record sales of indexed annuities for four years straight. However, some financial professionals have lost sight of this proposition.
Recent changes in our economy have sent the participation rates, caps, and other rates on indexed annuities on a downward spiral. While the 10-year treasury (a large driver of fixed and indexed annuity rates) was floating above 5.00 in 2007, today it is barely hovering around 1.70. This relates directly to the attractiveness of rates on indexed annuities. Annual point-to-point caps on the products averaged upwards of 7.00% five years ago, where today these same indexed crediting methods are averaging a paltry 3.13%. This dramatic change has a lot of insurance agents asking, “How can I make a sale on a product that may receive zero interest, but no greater than 3.13%?”
It is absolutely true that indexed annuity rates are the lowest they have ever been today. Although there is a product with caps as high as 8.05%, there are many products with caps as low as 1.00%. I am not going to underplay the difficulty of making the sale of this product, as compared to the same product five years ago. However, I believe that we as an industry are “psyching ourselves out.” Psychology tells us that these products are now “unattractive,” and has us asking “who would buy a product with such low rates?”
Let me tell you who. How about the young worker who’s only alternative is the 0.58% that he is currently earning on his savings account? Perhaps the pre-retiree who has the bulk of her retirement dollars just sitting and earning 0.45% interest in her checking accounts? What about the little old lady next door, who has nearly a million dollars earning just 0.33% in certificates of deposit? Your parents? They just bought some Series EE savings bonds that are earning 0.60%. They could have purchased Series I bonds, but they are crediting a miniscule 0.00% with an inflation component of 1.10%.
The bottom line is that rates on indexed annuities may be crummy today, but they are relatively competitive as compared to other vehicles that provide guarantees and protection of principal. So, don’t let the rates that are available on these products stop you from talking to your clients about indexed annuities!
Today, people are looking for safety. Thanks to extreme declines in the stock market in the years 2000 and 2008, too many savers have lost the bulk of their retirement nest eggs. While they could get this with a fixed annuity, they would only average 2.06% credited interest today. This isn’t bad compared to other fixed money instruments. Of course these savers want the ability to earn interest on their retirement dollars too. However, if they want those double-digit returns of yesteryear, they are going to have to compromise the safety feature, and risk losing money in a product such as a variable annuity.
The number one fear of Americans in 2011 was speaking in public. This year, it is outliving one’s retirement funds. That is no surprise since so many people lost so much money in 2008 AND people are living much, much longer today. In fact, there are 53,000 Americans today that are aged 100 plus; there were only 2,300 in 1950. A recent article indicated that the first person to live to age 150 is already walking the earth today! And wrap your head around this- the same reputable news magazine that provided those statistics indicates that Americans will have the ability to live forever within the next 20 years as a result of our medical advancements and the possibility of “growing” any human organ. With pensions disappearing and our nation’s social security system in limbo, people are looking for solutions to ease their fears.
Annuities are the only financial instrument that can provide a guaranteed income that you cannot outlive. Yes, they provide tax deferral, and the ability to earn additional interest. However, it is the guarantees offered by fixed and indexed annuities that resound so heavily with savers today.
Don’t psyche yourself out. Tell your client that there are products that can provide guaranteed preservation of principal, guaranteed protection from market losses and a guaranteed income that they cannot outlive. Getting back to these basic value propositions on annuities will result in simpler sales during even the crummiest interest rate crises.