Are we selling fixed indexed annuities (FIAs) correctly? I question those advisors who may find selling lifetime income benefit riders (LIBR) easier than presenting the total value proposition of the FIA. In light of current lower interest rates, higher spreads and reduced caps and participation rates in today’s financial environment, are roll-up rates the focus of the sales presentation?
If this premise is correct I encourage annuity agents to consider the following:
• What was the client’s financial purpose (income or accumulation)?
• What was the cost of the benefit riders against potential accumulation value?
• Does your client have the resources and flexibility to react to future financial changes/opportunities?
Despite persistent low interest rates and the recent bull market. FIAs have enjoyed an incredible run in recent years. Industry sales research from LIMRA and WINK report the continued growth of the FIA segment of the annuity market. Do these sales trends indicate consumers are finally realizing the FIA value proposition of “interest credits linked to the performance of stock market indices, with protection from market downside losses”?
Many Americans’ 401(k) account balances were decimated in 2001 and 2008. Many of those nearing retirement or ready to retire were forced to keep working because of their account’s exposure to market losses and no option inside their plan to protect their nest egg. It is not surprising that many of these safety-conscious savers would find FIAs an attractive financial solution.
While I believe FIAs have been a tremendous innovation to both consumers nearing retirement and our industry, my concern is some policyholders are confused between the actual interest credits applied to their policy’s account value and LIBR roll-up rates of 5 to 8 percent.
Despite media and competitor claims that “fixed indexed annuities are a complex choice” for the consumer, I believe most experienced agents and brokers who offer FIAs are able to present the product’s value proposition fairly and effectively. My concern is focused on two distinct points:
• Allowing the consumer to believe the 5 to 8 percent income benefit rider credit (only available for lifetime income) is applied to account value to overcome low crediting and base rates.
• Selling the income rider to clients more concerned with an opportunity for safe accumulation rather than lifetime income.
Like most revolutionary insurance products, FIAs have evolved into a wide array of interest crediting methods (point-to-point, monthly average, performance triggered, etc.). Another area of growth is the number of indices that are now available compared to 1995 when the S&P dominated early generations of FIAs (Dow, Lehman Brothers, Russell, foreign market, et al.). Let’s add in caps, spreads, and participation rate to determining the interest that will be credited to the contract and an inexperienced agent may have a challenge in helping prospects understand how this wonderful product works.
Note that nothing changed with the original value proposition: the opportunity to participate in market-linked gains without exposure to market losses. Many agents simply got lost trying to present the latest, greatest crediting method/market index subjected to a cap, spread or participation rate. This is where struggling agents quickly discovered the value of their annuity marketing organization (AMO) or brokerage general agency (BGA) in providing them real education and tools to set client expectations rather than an inflated, unrealistic illustration.
LIBRs and GLBs
Around 2005 the first income benefit riders were introduced to the FIA market. These riders are also known as guaranteed withdrawal benefit riders (GWBRs), and other carrier-eccentric rider terms exist. (Is it just me, or do you ever wish all the home office attorneys would get together and determine common and singular terms for the same items?)
This was, and is, an exciting concept—the ability to purchase FIAs with lifetime income guaranteed regardless of how long the policyholder lives. These riders provide a separate, income-only account growing around 5 to 8 percent annually while in deferral, and the client can choose when to turn the income benefit on, and in some instances, off. Recently, additional guaranteed living benefits like chronic care and enhanced death benefit have been introduced. Are agents defaulting to the “multi-tasking” benefits of these features rather than determining if the client’s goals and desires were focused on safely building accumulation?
What’s the Answer?
Depending on each client’s unique financial situation, an FIA replete with a full array of guaranteed lifetime benefits (GLBs) may be an appropriate solution. But with GLB election rates hovering around 70 percent, are these benefits being oversold?
In completing the fact-finding process with the prospect nearing retirement, we should have learned the following information:
• What are their financial concerns for the future?
• What are their current financial assets and liabilities?
• What other concerns exist? (Health, legacy, etc.)
• What is their risk tolerance?
From this interview you craft your proposal. I see your opportunity to be that of providing the best solutions possible for the least amount of premium. Rather than simply offering one FIA with a premium bonus and additional income, chronic health and death benefits, this may include considering multiple product solutions to meet your prospects’ needs and goals. Pay close attention to and respect your prospects’ concerns regarding risk tolerance, accumulation goals and income needs. Also consider that premium correctly placed in a FIA with LIBR is rarely, if ever, appropriate for replacement. This makes the selection of the best available FIA/LIBR solution even more important to you and your prospect.
Other possible solutions may include laddering multiple products including single premium immediate annuities (SPIAs) and multi-year guarantee annuities (MYGAs) that give your client more flexibility in the future and the ability to create multiple or increasing income streams. If accumulation is the primary goal, the client should not suffer reduced credited interest with the cost of unnecessary riders, and there are excellent accumulation products available for safety-minded consumers.
Sharing this information with your AMO or BGA for a case-development conversation can bring great value to both you and your client. Work with partners who offer suggestions and solutions focused on you and your client’s best interests. Few agents can keep up with the plethora of carriers and product solutions available in today’s annuity marketplace. Your annuity production partner should be able to quickly pinpoint both the best accumulation and lifetime income products based on your case information. Also, be open to listening to your AMO/BGA marketing specialist regarding carriers or products that better fit your prospect’s situation when appropriate. If you are constantly hearing a “one-size-fits-all” solution from your marketing resource, you should consider getting a second opinion.
