Selling Indexed Annuities in a Down Market
November 25, 2008 by Sheryl J. Moore
A lot of people are panicking about the economy right now, and why shouldn’t they? One of the largest insurance companies world-wide has accepted a loan from the U.S. government, as part of a bailout plan. Two other European insurance companies have accepted capital infusions from the Dutch government. Banks are going under left and right, and acquisitions are occurring on the turn of a dime. Consumers are worried; in just the past 24 hours, nearly 10 consumers called our offices, concerned about losing the money in their securities investments. Given that we provide services only to the insurance industry, those calls from consumers are alarming.
Is this a good time to look into offering indexed insurance products?
Absolutely. In fact, now is the best time to look into indexed products. Coincidentally, distributors and manufacturers that don’t have indexed annuities in their toolbox are missing a great opportunity.
Why?
1) During a time when so many are concerned about losing money, an indexed annuity product can offer the value of zero. That’s right, you heard me- zero.
Remember when everyone watched their account balances dive at the turn of this century? Well, if indexed annuities had been the accumulation vehicle, rather than investments, the contracts would have been protected by zero interest credited for each year the index declined.
For example: take a hypothetical ten-year indexed annuity contract, “A,” issued on November 20, 2007 with a premium of $100,000. At policy issue, the S&P 500 index was around 1,440. Today, a year later, the S&P 500 is at about 752, meaning the index declined by over 47% for the past one-year period. Wow- that is a big loss! However, policy “A” would receive zero interest crediting for the current one-year term.
I think every consumer would appreciate zero any day of the week, as opposed to a negative adjustment on their account value. Don’t you?
2) An indexed annuity’s minimum guarantee is a strong value proposition during turbulent markets. What do I mean? Well, consider that the average minimum guaranteed surrender value (MGSV) on all indexed annuities today is 87.5% of premium, credited at 3% interest (although minimums may range from as low as 87.5% @ 1% to 100% @ 3%). This minimum guarantee results in a return of the premiums paid in year five of the contract. If a ten-year contract is held to term with no withdrawals, the above guarantee would return nearly 18% to the client!
For example: using contract “A” from the above example, let’s assume the contract offers a MGSV of 87.5% @ 3%. This means that the policy owner would have received 0% interest crediting over the past one-year period—even though the index fell to nearly half of its previous level. However, let’s also assume that the index continues to fall every year for the next nine years of the contract. At the end of the ten-year term, annuity “A” would have a cash value of $117,592.68, assuming no withdrawals. A securities product would have been fully-exposed to the ten years of market declines, on the other hand, resulting in a loss of (at least) some the client’s original $100,000 investment. Sounds like a solid argument for indexed annuities, for those who are risk averse.
If a consumer isn’t happy enough with zero, then a return of nearly 18% should make them feel secure about their purchase. And, the client not only receives a guarantee on the premiums paid into the contract, but also a guaranteed death benefit and guaranteed income they cannot outlive. I think that is a great deal!
3) Probably the most attractive reason to consider indexed annuities in a down market is the potential indexed interest the policy may credit the following year.
All annual reset index products compare the value of the stated index on the day of policy issue and again a year later. Then, the policies credit interest based on the movement of the index, subject to a limit (such as a cap). Therefore, annual point-to-point crediting methods can seem especially appealing during times when the index dives. That’s because, when comparing today’s index value to what is possible a year later, the potential for indexed gains is greater than during more stable economic periods.
For example: assume a client purchased contract “A” on November 20, 2008, and that the S&P 500 has returned to a level of 1500 on November 20, 2009. Here, the index would have experienced an increase of over 50% during that one-year period. Policy “A” would receive the maximum indexed interest available, subject to a cap, participation rate, or asset fee.
That’s an awesome value proposition for annuity clients!
In closing, clients who are looking for accumulation, but are not willing to risk principal due to market fluctuations, are the perfect candidates for indexed annuities. Furthermore, if they looking for a product offering potentially higher interest than traditional fixed annuities, they should check out an indexed product. There is no better time for advisors to have this tool in their toolbox, than in a down market.
Sheryl Moore is President and CEO of AnnuitySpecs.com and LifeSpecs.com, an indexed product resource in Des Moines. She has a decade of experience working with indexed products, and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sheryl.moore@annuityspecs.com.
