Things they won’t tell you
August 24, 2021 by Sheryl J. Moore
I have viewed myself as an educator on life insurance and annuity products for well into two decades. That said, I’ve not been as vocal about some things as I maybe should. Let this article be a first step in righting those wrongs.
Who can you trust in the indexed annuity sale?
Maybe your prospect.
Insurance companies adversely affect the amount of indexed interest earned on the business they have on the books, and the way they do it may not be as obvious to you as you would think. Let’s discuss each of them here.
Bait-and-Switch on Inforce Renewal Rates
Yes, it happens. Insurance companies have to buy new options each year of an annual reset indexed annuity. Often, market conditions warrant reductions in caps, participation rates, and even increases in spread rates. Some companies outprice their products, knowing that they want uber-competitive rates in the first year, so they intentionally plan to reduce rates on the business, once it hits contract anniversary two (SN: function of independent agent distribution, not an issue endemic of indexed annuities as a whole). However, this one is pretty easy to investigate. Does the insurance company publish their inforce renewal rates, caps, pars, and spreads for either consumers or agents? If not- perhaps you should ask yourself why that is.
Changing Indexing Methods on Inforce Business
I have to tell you that this one didn’t seem like a big deal to me, when I was developing products at my alma mater. However, when they did it to my own annuity, after I’d rolled my 201(k) money into it, it became a very BIG deal to me! That’s right- I was earning WAY TOO MUCH on my multi-year indexing method. AND, the minimum cap on that indexing method was much too HIGH. So, the insurance company did the only thing that they could do and pulled the indexing method clean off of my contract, along with every other indexed annuity contract holders’. Think it won’t happen to your clients? Is the indexing method filed as a RIDER on the annuity (as opposed to being part of the base contract)? Then, there is a good chance it could happen to your clients too. Check the integrity of the company you are doing business with. Have they ever pulled inforce indexing strategies in the past? (Hint: Ask other agents, not the insurance company.)
Manipulating the Index
“Hey! That’s not possible!” you are thinking. Wrong. There have been insurance companies that have had their own indices, although only a couple. One index was developed by a company that was owned by a company that was owned by a company that was owned by a private equity firm that owned an insurance company that offered their proprietary index. (Did you get that?) In short- make sure the company in charge of the index is not the company in charge of paying your commission. Disclaimer: arbitrarily manipulating the performance of an index may not be something that has ever happened on an indexed annuity. Yet.
REALLY Manipulating the Index
You know these new multi-asset, proprietary, volatility-controlled indices? I like to classify them as “hybrid indices” because they are generally created by taking one or more other indices, smashing them together, and throwing a sprinkle of cash or bonds along with them, and making it an entirely new index. But, there is a problem. Have you ever looked at these indices? Let’s just say that we have one that consists of the XYZ Index, the ABC Index, and cash. The index is brand new, it has no history. So, the option pricing on it at introduction may be pretty darned attractive. This translates to attractive participation rates and spreads for the indexed annuity purchaser. However, have you ever noticed how these indices don’t stick around long? Before you know it, the index is being taken away, and replaced with some new index with a similar name. Maybe it was the ABC Index, but now it is the ABC Index II. Or, maybe it was the XYZ Index, but now it is the XYZ Preferred Index. You get the picture. What changed? Well, the name. But maybe there’s more. Perhaps initially, the cash component of the index was only 10% of the weighting of the three index constituents (ABC, XYZ, and cash- remember?). Now- maybe it is 90% cash, and only 5% ABC, and 5% XYZ!! That, my friends, will put some major drag on the performance of your clients’ indexed annuities. And the kicker is- nearly all of these indices have the ability to have the constituents arbitrarily “rebalanced.”
What happened to the good ‘ole days when I get could a plain, simple indexed annuity?!? It isn’t easy any more- TRUST ME!
Sheryl Moore is President and CEO of the life and annuity market research firm of Wink, Inc. Her company provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at firstname.lastname@example.org.