Annuity FYI Blog

According to Insurance News Net, “Fixed Annuities Make a Slow Recovery.”  Overall annuity sales stayed flat from March to April after a steady increase at the start of 2010.  The total variable and fixed annuity sales from banks in April was $3.3 billion.  Although that number was 26% lower than the $4.4 billion sold in April of 2009, the total annuity sales have increased significantly from their low point in January of 2010.

Fixed annuity sales increased 9% to $2 billion, almost doubling the total sales for January.  Sales were the highest since October of 2009, although still below last year’s April sales.  Traditionally, April bank annuity sales fall below March sales, so it is significant that this year was an exception.  Because fixed annuity rates are currently 6 basis points below CDs, the Kehrer-LIMRA Bank Fixed Annuity RateWatch thinks that sales in May will be down.

Variable annuity sales in banks were $1.3 billion in April, compared to $1.4 billion in March.  March sales however, were at the highest level for variable annuities since August 2008.  Investors shied away from variable annuities in part because their offerings seem to be less attractive than they were in the past.  $1.54 was sold in fixed annuities for every dollar of variable annuities sold through banks.

A strong debate over who should oversee equity indexed annuity products has been going on since the SEC introduced Rule 151A in 2008.  According to Investment News’ “Indexed-annuities amendment: Insurers yea, advisers nay” by Mark Schoeff Jr. and Darla Mercado, the debate between sides will remain even if this amendment makes a final decision.  Regulation of equity indexed annuities will remain in the control of individual states if the bill passes, instead of transferring to the SEC as they had hoped.  The products will be classified as insurance products rather than securities.

Insurers are happy that the annuities will remain out of the hands of the SEC, while advisers would have preferred the latter.  Allianz Life, the National Association of Fixed Annuities, and the National Association of Insurance Commissioners support the bill keeping the regulation of equity indexed annuity products at the level of the state insurance commissioners.  While Democratic leaders hoped that the products would be regulated by the SEC, most rank and file Democrats voted with Republicans that the control should remain with state insurance commissioners.

The advisers who don’t agree with this bill believe that consumer protection against abusive sales representatives targeting vulnerable people will be compromised.  They believe that FINRA and members of the broker-dealer world have more knowledge to regulate a product tied to securities.  Because of past problems with equity indexed annuities, the National Association of Insurance Commissioners has put new suitability standards on the products believing that will help get rid of shady sellers.  There is also a concern in the government that taking away the state regulation of these products will force smaller insurance companies and individual agents out of business, leading to increased unemployment.  The debate rages on until the final bill is signed by the President.

According to Bloomberg’s article “Wells Fargo Aims Market-Linked CDs at ‘Nervous Nellies’,” banks like Wells Fargo and Sovereign are trying to give investors the benefits of two worlds with equity linked CDs.  Authors Margaret Collins and Zeke Faux say that the popularity of this investment is based on the fact that investors have the potential for higher returns with the safety of FDIC insurance.  It is possible that an investor will not gain anything if the index doesn’t, but that is rare and they also will not lose any of their initial investment.  During times of high volatility in the markets, equity linked CDs become increasingly popular.  They occupy around 15 to 20% of structured settlements currently, which is three times the amount they did before 2008′s financial crisis.

Investors are seeking that FDIC insurance to lower their investment risk.  It makes sense since so many people lost life savings in the stock market collapse.  Wells Fargo’s wise indexed CD helped the company sell almost $5 billion worth of equity linked CDs last year.  Traditional CDs have very low rates right now, so linking your investment to an index gives the potential for more returns along with the benefits of traditional CDs.  Investors do have to pay yearly taxes on the estimated interest income, so make sure you look into all the fine details before purchasing.  If you have the ability to let your money sit for five or so years, you have the potential for nice gains without the risk of losing your initial investment.

Secondary market annuities have been around for 15 years, allowing investors who need or want to sell annuities to do so.  In “Don’t want that annuity anymore? You can sell it,” Vanessa Richardson of Bankrate discusses this market.  J.G. Wentworth estimates that there are $50 to $100 billion of annuities annually that can be sold in the secondary market.  They say that the past two years have really seen an increase in investor interest in these annuities.  They get much more control over their annuities with the ability to sell them for a lump sum of cash or payments over time.

Annuities are usually used for retirement income purposes, with over $200 billion sold each year.  In the secondary market, annuities are packaged together and sold to large institutional investors most often.  Investors who want to sell their deferred or immediate annuities do so for many reasons.  They may have inherited an annuity that wasn’t what they desire in investment terms, changed their investment or tax goals, had a financial emergency, or realized they are not happy with their annuity.  The secondary market is also good for people who don’t want to sell all of their annuity because you can sell part of it and keep the remaining payments.

There is a lot to learn before purchasing a variable annuity, according to “How To Cut The Cost Of A Variable Annuity” by Mel Lindauer of Forbes.  While there are variable annuities that just aren’t right for some investors, other products will work well.  You just need to do your homework.  Many deferred variable annuities have high costs, long surrender periods, high surrender fees, and are unsuitable for some investors.  The high costs do come with benefits that some investors desire and are willing to pay more for.  If you are looking for a more simple variable annuity though, there are low-cost, nonqualified variable annuities.

These products are good for investors who need an additional tax-deferred place to keep their money.  They also work for protecting the assets of people in professions that have a high risk of legal action being taken against them since many states protect annuity money.  If you find that you are in a high cost, nonqualified variable annuity contract, it might be wise for you to make a 1035 exchange and transfer your money into an annuity product better suited for you.  With all of this said about high cost, nonqualified variable annuities, it is important to note that most variable annuities are actually qualified, so they don’t have the tax disadvantages of nonqualified products.  There are many investor benefits related to variable annuity products, whether purchased with qualified money or not.