Indexed annuities emerged two decades ago as innovative accumulation vehicles. Income didn’t become a significant part of the annuity story until fairly recently, when the looming wave of retiring Baby Boomers brought it front and center.
Now it’s a whole new world. Survey after survey says that income is America’s biggest retirement concern. Clients want income solutions. And your portfolio of indexed products includes a plethora of feature-rich income riders.
But the need for income doesn’t take accumulation off the table. In fact, by focusing on the income story you may be missing an opportunity to address a significant client need – a need that indexed products may be uniquely equipped to satisfy.
Let’s Look at Some Numbers.
According to LIMRA, total annuity sales declined seven percent in the first quarter of this year. For fixed annuities, the drop was an even sharper eight percent. But fixed indexed annuities beat the trend, increasing 3 percent to $11.6 billion—the eighth consecutive quarter of growth. While first quarter sales are typically soft in the annuity marketplace, the continued strength in indexed products speaks to a consistently strong client value proposition.*
Now, let’s zero in on a data point that’s even more significant for our purposes. The election rate for living benefits—primarily income riders—on indexed products was 68 percent. That’s in line with our expectation that most clients are looking for income.
A Missed Opportunity?
But “most” doesn’t mean “all.” In fact, by not taking the opportunity to discuss accumulation needs you may risk losing nearly a third of your audience right out of the gate. And missing out on a $3.5 billion market in the process!
So there are plenty of clients out there hungering for a good accumulation story. But today, it’s a story with a twist: not just accumulation, but “safe” accumulation.
Nothing earth-shattering in that! Risk profiles tend to become more conservative as people approach retirement. It’s why preservation of principal usually ranks near the top in retiree surveys. Just spend a few minutes in conversation with a Baby Boomer client.
Yet in today’s environment, safe accumulation seems easier said than done. Even though the markets have not been unusually volatile by historical standards, a downturn can have a disproportionate impact on invested assets with a shorter time horizon. And continued low interest rates dilute the appeal of fixed income alternatives.
Upside Potential While Managing Downside Risk
Fixed indexed annuities are a strong accumulation play because they address both of these concerns. First and foremost, they don’t require a direct investment in the stock market – they’re insurance products that shield your clients from market risk. Since there is no direct downside market risk to your money, interest earnings during any given crediting period may be zero, but will never be less than zero—no matter how poorly the market performs. And fixed interest crediting strategies provide guaranteed minimum growth at a rate set by the insurance company.
At the same time, indexed interest crediting strategies offer enhanced growth potential when markets are expanding. The number and variety of these strategies has grown as fixed indexed annuities have evolved. Options inside a typical indexed product today may include crediting periods from one to five years; multiple indexes inside a single crediting strategy; volatility controlled indexes, and hybrid designs that allocate to a combination of fixed and indexed strategies. Each of these options may offer the potential for enhanced growth in specific market environments, so product selection is critical—and allocating premium across several strategies may help to improve your client’s chances of maximizing accumulation over the life of the contract.
Tax-Deferred Growth to Boost Accumulation
Like all annuities, indexed products also offer the advantage of tax deferral. While it doesn’t apply in all situations – no additional tax benefit is gained by rolling funds from a tax-advantaged retirement savings plan into an annuity – after-tax dollars can grow faster in a tax-deferred product like an annuity because interest compounds on top of the money a client ordinarily would have paid in current income taxes. Plus, clients in retirement may find themselves in a lower income tax bracket due to lower annual income, making tax deferral even more attractive.
Typically, fixed indexed annuities are designed to provide growth now for income later, but there are times when a client may need access to the contract’s accumulated value. Fixed indexed annuities typically offer liquidity options in the event needs change. When outside the surrender charge period, a client has access to the full accumulation value without penalty.
Accumulation Today – Income Tomorrow
While we’ll explore income strategies next month, the availability of optional liquidity riders (usually for a charge) is an important part of the fixed indexed annuity accumulation story. In addition to providing lifetime income withdrawals, income riders allow your client to pursue growth while retaining access to the contract’s accumulation value during the accumulation phase. Deferring income also allows time for the income base to accumulate.
Fixed indexed annuities provide an attractive option for clients seeking both accumulation and protection from market risk, regardless of their income needs. And while the value proposition of fixed annuities remains fairly straightforward—pay an insurer today for income in the future—indexed products may offer your accumulation-minded clients exactly what they’re looking for.