Date posted: October 22, 2014
Fixed indexed annuities have a lot of pieces and parts. They are more complex than the fixed annuity products that came before them. In The Aiken Standard article, “On the Money: Equity-indexed annuities are popular but complex,” Greg Roberts defines the terms that are associated with fixed indexed annuities and offers basic annuity refreshers. Annuities are contracts between you and an insurance company. You purchase this product with a lump sum or a stream of payments and the insurance company makes payments to you for a period of time or your lifetime. An immediate annuity pays you right away, while your payments come in the future with a deferred annuity. Deferred annuities have an accumulation phase before you begin receiving payments and then a payout phase.
Annuity products can be fixed or variable. Fixed annuities guarantee an interest rate during your accumulation phase and then guarantee your payments. They also have tax advantages and sometimes offer credits if interest rates get higher while you are in your deferral phase. Your interest rate with variable annuities is dependent upon your annuity’s investment accounts. Variable annuities are considered securities and are regulated by the SEC. Fixed equity indexed annuities are a hybrid of these two types of annuities. You typically receive a guaranteed minimum interest rate or are at least guaranteed that you will not lose your principal. Your interest is also linked to a stock market index. You take on less market risk than you do with variable annuities, but have the potential to gain in the markets unlike with fixed annuities. While indexed annuity sales are regulated by state insurance departments, many people think that these products should also be regulated by the SEC like variable annuities are.
Indexed annuities have a lot of different features that can affect how much interest you receive. Make sure that you know all of the complex moving parts associated with your fixed indexed annuity so that there are no surprises. Participation rates are the percentage of any stock market gain that you will receive. Ideally, you would like a 100% participation rate so that you could take advantage of any gains in the markets. Many indexed annuities offer 90% participation rates. Some indexed annuities have an interest rate cap. This cap means that you cannot earn more than that much interest in any time period.
A spread, sometimes called a margin, is an amount that will decrease any percentage of market gains you receive. If your fixed indexed annuity has a spread of 5%, your gain would only be 1% if your index increased by 6%. Each insurance company uses a different indexing method with their fixed indexed annuities. Ask questions from your advisor so that you understand the indexing method associated with your product. Most fixed equity indexed annuities guarantee your principal and some even guarantee a minimum interest rate credit. Indexed annuities have surrender charge periods around 5 to 10 years, so it is important to make them a long term investment to avoid paying surrender charges. Fixed equity indexed annuities might be the right tool for your personal financial plan, so speak with an expert to help you understand all of their features and terms.
Date posted: October 21, 2014
It used to be mandatory to purchase an annuity to finance your retirement in the UK. Earlier this year, their Chancellor George Osborn removed this requirement, but said that annuities are still worth consideration. According to The Telegraph’s Steve Lowe, annuities are still an important part of retirement planning. His article, “Four reasons why we do still need annuities,” offers insight that is applicable to retirees in the United States as well. The article says that annuities should be a central piece of your retirement planning, even though they are no longer required after UK pension reform. Consider these four reasons why annuities should be taken into consideration when retirement planning.
Annuities can give you freedom in retirement. You are free to spend the income that you receive from your annuity products without any worry that you will lose that money. Other investments often involve more risk, higher costs, less certainty and sometimes even more complexity. Annuities, in conjunction with the state pension they receive in the UK, can be used to cover all of your basic living expenses. This holds true in the U.S. with Social Security and any pension income you might have from a job. Then you have flexibility to invest or spend your other money because you know that your basic costs will be covered.
The second reason to consider annuities is that they offer a good value for your money. You definitely need to shop around from different companies and review different products, but the guarantees offered give you great value. Your health and lifestyle help to determine your annuity income. It is also dependent upon your age and whether or not you choose to add a partner to your product. The UK offers “enhanced” annuities that give purchasers higher rates than “standard” annuity products for those who qualify.
The fact that annuities are actually insurance products means that they offer great protection to your financial plan. Money is pooled together so that you can combat the risks that are inherent as you age. The article points out that UK annuities are financially backed by very strict regulations and capital reserves. U.S. regulations are getting stricter and although there is no federal backing of annuity products (yet), states offer guarantees up to a certain limit. No matter how careful you are with your money, you are subject to market and longevity risk if you do not have the guarantees that come with annuity products.
Finally, annuity products are often misunderstood. When the UK Chancellor said that no one will have to buy an annuity product anymore, he added more to the end of that statement. He said that many people will still desire the certainty that comes with an annuity and he has made it easier for them to shop around for the product that best fits their needs. Before listening to untruths about annuities, do your research to determine their pros and cons. Get annuity quotes for your individual tailored situation. Annuities offer lifetime income, return of principal in the case of an untimely death, inflation protection and death benefits, among other things. The same reasons that annuities are still important to consider in the UK apply to those of us in U.S. as well.
Date posted: October 16, 2014
The NAIFA 2014 national conference took place last month in San Diego. This National Association of Insurance and Financial Advisors career conference and annual meeting helped to inform those in the financial industry of changes happening this year. Insurance News Net posted a series about some of the things “Heard In The Hallways – (at the) NAIFA 2014 Convention.” We often discuss the importance of guaranteed income to consumers. As the industry has changed and insurers have scaled back on some of their benefits, the question of whether guaranteed lifetime withdrawal benefits (GLWB) are still desirable has come up. Insurance News Net asked whether these GLWB riders are still in demand with fixed and variable annuity products.
Three different financial experts gave their opinion on the current state of guaranteed lifetime withdrawal benefits. The first said that there is a very high demand for GLWBs from consumers who have accumulated retirement savings and are concerned about losing the money they worked so hard to save. Those consumers looking to turn their savings into a stream of income are looking for a few things from these riders. They want their money to be protected against market downturns, but they also want to be able to take advantage of market gains. This makes variable annuities with GLWBs desirable to many consumers. Most people don’t know the term GLWB, but they are able to perfectly describe the benefits that they want in a retirement product and these riders fit the bill. Not all insurance companies are offering GLWBs with variable annuity products anymore, so it might take a bit more research to find a strong company offering these benefits.
Another advisor confirmed that the demand is still there for variable annuities with guaranteed lifetime withdrawal benefits. They have been in high demand for years and will continue to be in demand for years to come. The greatest demand comes from people who are 50 and over and looking for fixed income payments to carry them through after retirement. This GLWB guarantee protects your income without subjecting it to potential market downturns.
Finally, the third advisor says that while there is still high demand for GLWBs, sales of these riders have decreased because of insurers cutting back on the benefits and charging higher fees for the guarantees. He believes that deferred income annuities and single premium immediate annuities will become the top income solutions if interest rates increase. SPIAs and DIAs can often give consumers more income than a variable annuity with a GLWB for the same premium price. For those worried about inflation, there are affordable inflation riders that can be added to a SPIA or DIA as well. That option is not valuable when added to a variable annuity with a GLWB. Current market conditions make variable annuities with guaranteed lifetime withdrawal benefits attractive, but that might change if interest rates continue to increase. Regardless of which annuity product you use, the guaranteed income available with annuities is hard to match elsewhere.
Date posted: October 14, 2014
The annuity industry is evolving as our needs and the economic climate both change. Some of the things about annuity products that people most often dislike are actually falling by the wayside. Those annuity benefits that everyone desires are becoming easier to obtain. In Stan Haithcock’s Marketwatch article, “Hate annuities? 7 reasons you might change your mind,” he says that the industry is changing for the betterment of consumers. Each year, there are more $200 billion worth of annuities sold in the U.S. But with an influx of Baby Boomers nearing retirement and a strong demand for guarantees, there is a lot of room for the annuity industry to grow. That growth will come with some major changes.
Annuity commissions are decreasing, as many of them should. Wells Fargo was the first company to ask for lower commissions tied to fixed indexed annuities. Agents should be compensated fairly, but certainly not at the expense of value added into the products. The complexity associated with some annuity products will be replaced by simpler, more easily understood products. There are 15 different types of annuities, but most annuity sales are from variable and indexed products. Mr. Haithcock believes that these more complex annuities will represent the minority of annuity sales in the future. They will always be around because of the unique benefits that they offer though. He forecasts a shift to lower commission, more easily understood annuities with no annual fees. These include fixed annuities, longevity annuities, and single premium immediate annuity products.
The article also says that the number of annuity agents will drastically decrease, much like the number of travel agents has over the past few decades. The author predicts that the majority of annuity sales will be directly from the insurer to the consumer. This makes finding unbiased annuity information even more important than ever, so Annuity FYI will continue to offer up to date and valuable annuity information. It’s rather surprising that annuities are still regulated on the state level, but federal oversight is likely to come soon. Variable annuities are regulated by the SEC because they are defined as securities, but it won’t be long before indexed annuities and the other types are regulated by the federal government as well. This is a good thing for consumers because unethical sales practices will be nearly eliminated.
Everyone loves the guarantees offered by annuities, but many people still don’t want to purchase one. Contingent deferred annuities guarantee income through their attachment to stock and bond portfolios, but your money remains liquid. These annuities that offer income guarantees without the annuity commitment will likely increase in popularity. The July 1 government ruling allowing Qualified Longevity Annuity Contracts (QLAC) in retirement plans will be the driving force that makes annuities just as commonly owned as mutual funds. They will soon be seen in most portfolios to help guarantee an income stream to replace the pensions of the past.
Deferred income annuities will be the top selling annuity within five years, or at least Mr. Haithcock believes so. We just published a new article about how the new deferred income annuities are the one true path to income, so we wouldn’t be surprised to see their popularity continue increasing either. These DIAs, or longevity annuities, don’t have an annual fee and offer a lot of flexibility when it comes to creating income for you and your heirs. They are one of the best ways to create lifetime income by transferring your longevity risk to an insurer. By using a DIA in your retirement plan as a QLAC or outside of your workplace retirement savings, you are setting yourself up for a successful financial future. Stay tuned to Annuity FYI to see if Mr. Haithcock’s seven annuity predictions hold true and to find out the most important up to date information about the annuity industry.
Date posted: October 13, 2014
Almost everyone is looking for some type of guaranteed income when planning their financial future. This is one of the reasons that fixed annuity sales have been increasing this year. The increase in fixed annuity popularity has been driven in large part by fixed indexed annuities. In Life Health Pro’s “Why Clients Want The New Fixed Indexed Annuities,” Robert Bloink and William H. Byrnes introduce a new kind of fixed indexed annuity product. These indexed annuities offer a wider choice of indices from which to choose, so that consumers have a greater participation in the markets. Markets have been stable for some time now, but consumers are still worried about losing money like many of their family and friends did back in 2008. With newer hybrid fixed indexed annuity products, you have more potential to achieve large market gains but you are still protected from large losses.
Hybrid indexed annuities are known by a few different names in the industry. Their basic difference from traditional indexed annuities is that they tie your market gains to more than one stock market index. There are a few benefits to tying your market gains to more than one stock market index. You have less risk of loss when your money is allocated between multiple indices. You are also able to maximize your potential for gains when your money is allocated this way. Many hybrid fixed indexed annuities allow you to allocate money in smaller, nontraditional indices that are not often available with basic indexed annuities. Fixed indexed annuities offer you a cushion against losses. The trade-off is that your market gains are capped. By combining more than one market index with a hybrid indexed annuity, you typically put yourself in a better position to balance gains and losses. Money is shifted often between stock and bond market indices as the markets change. This allows you to maximize your potential for growth and minimize the risk of any losses.
Keep in mind that some of these hybrid fixed indexed annuities are marketed poorly. Fixed indexed annuities are capped and have participation rates to allow insurers to maintain their books while still offering you great benefits. So-called “uncapped” indexing does not truly give you a full 100% participation rate. Insurance companies have to protect themselves in the case of down markets. Make sure that you know the details of your cap, participation rate and spread with hybrid fixed indexed annuities. These products do not offer unlimited growth potential, but they do offer valuable growth potential and downside protection. Indexed annuities are likely to remain popular because of their income guarantees and potential for market upside combined with downside protection. Combining traditional and nontraditional indices is a good way to take even more advantage of market upsides. If you are considering a hybrid fixed indexed annuity, an expert at Annuity FYI would be happy to answer your questions.