Q: The hot topic seems to be product innovation, with all of the combo and living benefit riders. The problem is that while these products are similar, they are different enough that producers must take great care in choosing the proper one for their clients. What suggestions do you have for producers about this dilemma?
John Douglass: Watching benefit riders develop has been very interesting. Initially they were very popular as part of variable annuities, and they have transcended into being the number one driver on indexed annuities. These riders have positives and negatives.
The positives are guaranteed income, impressive roll-ups even in hard times, and now the added death benefit, confinement benefits, etc.—all in one product. The negatives would be the increasing fees, lowering roll-up interest rates, and loss of liquidity to completely exit a contract in the future.
If there is anything guaranteed in this world, it is that these current products have a shelf life that will expire, and the next generation will then be introduced. Look how much the products have changed in just the last five years. Agents selling these riders will be dealing with customer service centers to make sure that promises made at the point-of-sale will be delivered at a point in the future—in some cases 10 years out. This could be a slippery slope for many insurance brokers when they make promises to clients at the point-of-sale and need to deliver in the long term when the client “turns on” the benefits.
I am concerned with the income rider benefits’ projections. I do not find a lot of detail regarding actual guaranteed benefits in the sales materials, which is common in the insurance industry today. [JD]
Rich Hellerich: One of the best educational resources agents and financial advisors should rely on is their independent marketing organization (IMO). I believe you are correct in suggesting that “the devil is in the details” regarding subtle and not-so-subtle differences in features, benefits and charges found in these new product offerings. With the multitude of carriers and recent product launches, it is impossible for a busy producer to stay abreast of all the developments and changes in the market, and their IMO annuity marketing specialist should be their first source of information to assist with addressing client needs and offering appropriate case solutions. Another benefit in working with their IMO should be the education in how to properly position these new benefit enhancements for the prospect. This is a great opportunity for producers to discuss the financial impact a chronic care issue might have on a prospect’s retirement nest egg, and how any available death benefits work to the advantage of the spouse and heirs. Such a conversation will greatly assist agents in educating their prospects on these issues and in improving thorough fact-finding to determine appropriate and suitable solutions. Depending on the specific client situation, the solutions may be to offer traditional LTC or life insurance products in addition to, or rather than, a combo product.
The introduction of these new products gives quality producers the opportunity to provide greater value to clients and prospects while helping them create a financial plan that addresses the “what-ifs” of retirement. In addition to access to guaranteed lifetime income, clients can access these additional benefits and flexibility with chronic care protection and enhanced death benefits with the appropriate fixed indexed annuity (FIA).
The bottom line is to not be a product pusher, offering all prospects the same product solution. Take advantage of the assistance and expertise of your annuity and life marketing resources! [RH]
Ron Lane: Let’s quickly review annuity product design during the last several years. To gain or keep market share, actuaries tweaked fixed annuity products to compensate for low interest rates. Each carrier was forced to keep up with the others by offering their tweaks along the same lines. Insurance producers found it harder to differentiate products due to the number of carriers adding guaranteed lifetime withdrawal benefits, long term care waivers and enhanced life insurance benefits.
Product actuaries knew there were only 100 pennies in a dollar and that every additional policy attribute would cost something—either a percentage of the gain for each year or lower caps. Of course all annuity products must be balanced to generate value for the client, compensation for the producer and profit for the carrier. These consumer-centric annuities with additional attributes usually offered less compensation to the producer or lower cap rates for the client.
Before agents can suggest or recommend annuities with their various benefits (and various costs), they must ascertain their clients’ short and long term goals. Agents need not offer GLWB riders to clients who are using their fixed annuity as a warehouse for money which they intend to pass to a loved one at death.
In most cases, when explaining income riders to interested clients, agents should first focus on the payout percentage before going over the roll-up rate. The agent should always discuss and determine an appropriate deferral period for the client. It is also important to discuss the rider cost and to provide illustrations for a target date which show how the income account will grow over time. Roll-up rates, payout factors and additional comparative information is available through numerous websites.
Agents should determine each client’s investment temperament. Some clients will be worried about outliving their funds; they may be more receptive to purchasing income riders. Other clients may only be interested in deferring their accounts and leaving an inheritance for loved ones. In those cases, there are some excellent death benefit riders that can almost double the death benefit if paid out over a period of time.
To maintain good relationships, agents should arrange annual follow-up meetings with clients to review their statements. These meetings remind clients of the value annuities play in their retirement portfolios. They can also uncover new situations that may lead to changes in policies, and generate additional purchases or referrals. [RL]
Q: Now that the market appears to be starting to turn around, what do you see in the future for indexed annuities?
Hellerich: I would ask if the market is really starting to turn around and what are the odds of long term gains and improvement? What is the primary source of monies coming into the market today, and is this growth sustainable given other realities in our economy? Regardless of your answers to these questions, we can still make a great case for considering FIAs in preparing a sound retirement financial plan!
Some obvious benefits of traditional fixed annuities, subject to holding the contract to term and specific policy provisions, include:
• Guarantee of principal (safety)
• Guaranteed minimum growth
• Tax-deferral (triple compounding)
• Guaranteed lifetime income options
• Liquidity
• Estate planning benefits (probate)
In addition, we know FIAs offer the potential of market-linked growth without exposure to market risk. In this low interest rate environment, a policyowner enjoys all the benefits of a traditional fixed annuity plus the potential of higher credited interest to the contract without risking principal! Add the multiple indexing strategies found in most FIA contracts, plus the option of a declared fixed-interest credit, and you have a guaranteed insurance product that every baby boomer should be acquainted with when developing their financial strategy for retirement. Also consider the FIA for clients desiring a guaranteed amount of lifetime income benefits with riders offering roll-up rates of 4 to 6 percent or more for purposes of income.
Can you think of a better financial vehicle to offer safety-conscious consumers approaching retirement with today’s uncertain economic climate?
We are bullish on fixed indexed annuities. With 10,000 baby boomers turning 65 every day (and another 10,000 turning 64, 63, 62, etc.) there has never been a better time to present the FIA value proposition. In addition, fewer agents are entering the marketplace, so existing producers who embrace educating prospects on the FIA value proposition should flourish. [RH]
Lane: The market turnaround may be coming to a close with the presumption of higher interest rates around the corner. As I draft this response, 10-year Treasury notes are yielding 2.69 percent. Now let’s compare that to a record low of 1.379 percent on July 25, 2012.
I think we will see higher interest rates in the future and that usually coincides with market decline. With higher interest rates, lackluster fixed annuities will regain their glow. However, I do not feel that minimum guaranteed interest rates will ever return to the 3 percent or higher rates of yesteryear. That provision almost destroyed some insurance carriers when interest rates hit rock bottom a few years ago.
Conversely, if we assume that the markets will continue to increase, indexed annuities should be made more attractive than they are today. It’s really about carriers being able to make their spreads while still offering consumers viable annuity products. The industry needs to find ways to simplify indexed annuities so that more agents will feel comfortable offering them to clients.
I have to admit, there are so many ways of crediting interest, charging for riders, and dealing with hundreds of other indexed annuity nuances that I even get lost sometimes—and I work with this all day, every day. I can only imagine what insurance professionals must go through when they are also offering life, health, disability, LTC, P&C…you get the point. [RL]
Douglass: What do I see in terms of the future for annuities? Red-hot! We have seen a jump in the cap rates on indexed products. It has been a resounding echo that the market is coming alive. As these cap rates go higher and as more brokers sell products, it shows that the economy is starting to turn around. I look forward to higher cap rates and better product features, and I think the indexed world is going to thrive—perhaps not as strong as when we first introduced them in the 1990s—but we’re coming back!
Multi-year guaranteed annuity rates are also increasing to higher interest yields on shorter durations. I expect a very strong 2014.
Brokers should contract now and get product suitability training up-to-date and be ready as rates rise. Since many brokers may have lost their company appointments due to inactivity, they must act now to be ready for the next sale. Better days are coming fast! [JD]
