Fixed indexed annuities make a comeback
May 19, 2010 by Melissa Mlasko
Published 5/3/2010
The fixed indexed annuity industry has made tremendous strides since the infamous Dateline NBC “sting” operation, “Tricks of the Trade” (April 13, 2008). Today, because of volatility of the equity market, this space is making a strong comeback and is becoming an invaluable strategic tool for retirees now and for the foreseeable future.
The key component to sustaining this success lies on the agents’ shoulders. The carriers have done their part by redesigning their products to make them more agent-friendly and client-centric. However, agents need to remain educated and guide their clients on how and when these products are viable solutions for an overall retirement plan.
Product overview
The fixed indexed annuity (FIA) is a unique product in our toolbox. It is a fixed annuity that earns interest and provides benefits that are linked to an external equity index. One of the most commonly used indices is the S&P 500.
An FIA is different from other fixed annuities because of the way it credits interest to the annuity’s account value. Some traditional fixed annuities credit interest based on a rate set at contract issue. There are other fixed annuities where the interest rate credited to the contract could be potentially reset annually. FIAs credit interest using a formula based on changes in the index to which the fixed annuity is linked. The formulas decide how the additional interest, if any, is calculated and credited.
FIAs offer many of the benefits retirees and pre-retirees are most interested in today: wealth preservation, growth potential, guaranteed income payments, premium flexibility, tax-deferred growth, and protection for beneficiaries. In essence, an FIA could be considered a “best of both worlds” product. On one hand, clients want the safety and guarantee of principal and credited interest. On the other hand, most people would probably prefer the potential of higher interest by being linked to the market — the return potential that a fixed-rate product cannot offer.
In the past, the choices were either (1) receive the guarantee of principal and a set amount of interest; or (2) link to the market with the potential of higher returns, but also accept the downside risk to the principal, which is the case with a variable annuity. An FIA offers guarantee of principal and the potential of market-linked growth with no risk of loss of principal due to market downturns.
Given the overall positives of this kind of product, why have many agents shied away from it in the past? Certainly, the negative publicity surrounding annuities in general and FIAs in particular have not helped. For years, many advisors considered the FIA as a high-commission product with no meaningful place in retirement planning. They simply didn’t sell FIAs because they believe the product to be complicated, costly and unfriendly to the consumer.
Making a comeback
So what has changed that is pushing FIAs back into the limelight? Clearly, the stock market downturn in 2008 scared many of our baby boomers — those preparing for retirement and those already in retirement. Some saw their investment portfolios shrink up to 40% and suddenly realized that safety and guarantees need to be a top priority for their retirement nest eggs.
In addition, these same folks are concerned about making their income last for the rest of their lives. The difficult economy and the shrinking assets brought home that message loud and clear. The concept of the “best of both worlds” makes sense for many who are looking for wealth preservation, but also understand that growth potential is a necessity for the long run.
An FIA is also attractive to those people who are rolling over IRA or 401(k) plans. As part of their retirement savings, FIAs look and feel like personal defined benefit plans. Again, the allure of an FIA is the principal guarantee, the opportunity to participate in the upside potential of the equity index to a certain extent, as well as the ability to generate a guaranteed income stream. An FIA is a strong product choice for individuals as well as small business owners looking for retirement savings vehicles after maxing out other qualified plans.
Finally, the Obama administration has given its stamp of approval, jumping on the guaranteed income bandwagon and even including annuities in a report from the administration’s Middle Class Task Force that came out in January. Annuities are among the tools the administration is promoting as it tries to give Americans a better shot at a more secure retirement, especially if the greatest risk in retirement is running out of money. Only annuities can help guarantee that you won’t run out of money, and the unique features of an FIA address some of the growth issues people might have, as well. And, if the administration offers any incentives related to annuities, it will only help push the product even further into the forefront of retirement planning.
Best practices in selecting and selling
All this good news and positive coverage on annuities and FIAs means that as agents and advisors we have to be more diligent than ever in how we choose specific annuity products to sell and how we sell them.
It is important for agents to choose companies backing the annuity product that are highly rated by the industry rating companies and offer competitive products. For example, through my affiliated distribution organization, I have access to what we refer to as a “best-in-class” portfolio of products including annuity contracts. The organization uses a stringent due diligence process with a focus on carrier financial strength, client service, product quality and competitiveness.
With an economy that is still struggling, consumer concern about the strength and stability of financial institutions, and increase regulation of the insurance industry, the value of an ongoing due diligence process for carrier evaluation is incredibly important to my organization. As agents, we also need to understand the parameters of our state’s guaranteed fund association for insurance companies and products which can provide a layer of security for clients who purchase annuities.
On the surface, FIAs are easy to understand and talk about with clients. But there are many details related to the interest crediting methods for the growth potential aspect of the product that require the agent to understand the contract inside and out, and to be able to communicate the mechanics of it to the consumer.
I prefer FIA contracts that offer a choice of interest crediting methods such as a fixed account, a one year point-to-point indexed account, a one-year monthly cap indexed account, and one-year monthly average indexed account. I also favor contracts that offer a choice on how clients can generate an income stream which include systematic withdrawals, annuitization and lifetime income riders.
When working with prospects, I also focus on FIAs with a 10-year surrender period or less. That being said, it must be made perfectly clear that these are intended to be long-term commitments. If prospects think they might want to make a purchase or gift the assets to adult children or grandchildren, this may not be the product for them. It’s a strong product if they want to invest a portion (repeat: a portion) of their retirement nest egg, potentially grow that portion, and be guaranteed that they will never lose money if they keep the contract for the full term.
Once the surrender period is up, they can either take that money as guaranteed income to supplement what they currently receive from pension plans, investments or Social Security or they can simply take that money and walk away or choose to reinvest it.
It is also a comfort for clients when they discover that they can access their account value if they become confined to an assisted living facility, or if they become terminally ill or die, their beneficiaries will receive the full account value while avoiding probate court.
When I introduce this product, I generally focus on individuals between the ages of 59½ and 75. This is the demographic, in my opinion, looking for safety and the potential to generate an income stream. In terms of liquidity, at age 59½, individuals can begin to withdraw up to 10% of the account value penalty free or the entire amount if the contract is out of surrender. In addition, I conduct a comprehensive review of all their income streams from IRAs, 401(k) and other qualified plans, investments, and Social Security. It is imperative to review all possible retirement income sources with clients to help determine how much savings should be allocated to an FIA.
Ultimate success in serving your clients and using FIAs as one of the tools to help them create a secure retirement depends upon education and communication. Educating yourself fully on this product, its complexities, and its suitability is the first step. The next step is to focus on how you communicate to and educate potential clients on the benefits, features, and appropriateness of FIAs for their unique circumstances.
No matter how much good news and more positive views the media, the industry, the public or the government shed on annuities and FIAs, doing what’s right for clients, keeping their retirement nest egg and income streams safe from volatility are paramount to both you and your clients’ long-term success and security.
Melissa Mlasko is an agent with Futurity First Insurance Group’s Medford, Ore. branch, and is the branch’s annuity specialist. Futurity First is an independent, nationwide insurance distribution organization specializing in financial security for families, seniors, small businesses and the self-employed.
