Annuity FYI Blog

According to Annuity News Journal’s Henry Steelman, 2012 looks to be another popular year for annuities.  In the article, “Annuities for 2012 could see even more interest,” it says that an increased interest in annuities began around five years ago.  That was the time that the financial markets took a deep downturn and worries over stock market investments increased.  Because of the lifetime guarantees offered by annuities, they are popular in retirement plans and with investors looking for a safety net for their money.  During the same time frame that annuities have increased in popularity, fixed equity indexed annuities have also been climbing in numbers because of their security and growth potential.

Now that it seems like the economy and financial markets are getting stronger, there is still a strong interest in annuities.  Investors have realized that putting some of their money into annuities gives them financial stability into the future.  They are a good part of the plan to a secure financial retirement, especially along with other investments regardless of the state of the economy.  There are many organizations and insurance companies promoting annuities, so consumer knowledge has increased tremendously.  That education, coupled with a need to secure their financial future will likely draw more investors to annuities in 2012 and continue their popularity.

Written by Rachel Summit

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Indexed annuities have been getting a lot of attention lately, thanks in part to the fact that their optional living benefit riders are a bit more generous than similar riders on variable annuities.

They’ve also taken a welcome step that could lead to greater price transparency, indexed annuity expert Jack Marrion of AdvantageCompendium.com recently explained to me.

The low interest rate environment, ironically, seems to be responsible for this positive effect, he said. As I understand it, prevailing rates are so low that sellers of indexed annuities no longer have the option of supporting the cost of certain standard product features by reducing the interest rate that is credited to the annuity when the rate comes up for annual renewal, starting in the contract’s second year.

To cope with this squeeze, a few issuers of indexed annuities are beginning to explore “unbundling” the product. In other words, they’re starting to let the customers decide which options they want to pay for and which ones they don’t. Think of it as the start of a shift from “prix fixe” to “a la carte.”

While this subtle change in product delivery doesn’t solve the low-yield problem (which Federal Reserve chairman Ben Bernanke promises could last until 2014), it “may one day lead to greater transparency” regarding the component costs of indexed annuity contracts, Marrion says.

Written by Kerry Pechter

Larry Martin of the Leavenworth Times in Kansas has a pyramid example of retirement investing.  In the article “Annuities good retirement savings options,” Martin says that both fixed annuities and indexed annuity products are good options for growing your retirement savings.  His example includes a couple looking to save for retirement and pondering the best options.  The safest investments are at the top of his pyramid and the most risky are at the bottom.  Bank’s savings accounts and CD’s are the safest investments because of their FDIC insurance coverage.  But a savings account will only earn you around .5% in interest and a good CD will earn you around 1.74% in interest.  Since most retirees want to earn more than that, they should probably spread their money around.

Fixed annuities offer better rates than banks, but the historically low rates are still around 3%.  Without FDIC insurance, your payout from fixed annuities is based on the strength of the insurance company and any state guarantees in existence.  Indexed annuity products are the next level in Martin’s pyramid.  They guarantee your principal like a fixed annuity and also base your rate of return on a stock market index.  There are many options to offer you added guarantees for a fee, but some may be worth it to you.  Indexed annuity payouts are also based on an insurer’s strength.  Equities like stocks, bonds, and ETFs are the riskiest investments in the pyramid, but also can offer the highest payouts.  You need to find the best way to balance your desire for gains with your tolerance for risk.  Fixed annuities and indexed annuities are two good investments to help balance your risk and reward.

Written by Rachel Summit

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Indexed annuities have been growing at a much faster rate than variable annuities and fixed annuities in the past 5-10 years.  The Life Health Pro article, “New players enter indexed annuity space” by Maria Wood, says that the compound annual growth rate for indexed annuities was 9.3% from 2005-2010.  Variable annuities grew 1.9% and fixed annuities grew 2% in the same time frame.  These statistics were taken from Conning Research & Consulting’s indexed annuity study.  Indexed annuities are likely to continue their growth pattern because of great opportunities, but they also have to face some challenges coming their way.

A new trend looks to be occurring that signifies a return of the “captive agent,” as opposed to using more distribution networks.  Allianz Life is the first company signaling that return with their fixed equity indexed annuity product.  Their “virtually tied agents” have to submit to a suitability review from Allianz.  While this strategy is working for Allianz so far, the use of virtually tied agents and distributor-designed products does hinder competition.  These are some of the challenges to which indexed annuity providers seek solutions.

Big names in the variable annuity market have started entering the indexed annuity territory and that trend is likely to continue.  The entrance of Hartford and Genworth offers a bit of a threat to those currently selling indexed annuities.  Some advantages variable annuity providers bring include distribution networks that have already been established and experience with hedging for living benefits and index linking returns.  Rule 151A’s elimination made it easier for these variable annuity players to enter the indexed annuity market.

Written by Rachel Summit

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I just read an interesting article about annuity fees that included a detailed comment with added information.  In the article, “The skinny on fat annuity fees,” Sheryl J. Moore of Life Health Pro talked about the fees associated with variable annuities.  She talks about a common complaint about annuities being “expensive.”  She says that the average annuity fees for a variable annuity are around 4.5%.  These fees include an administrative service charge, a contract maintenance charge, a mortality and expense risk charge, and an underlying funds expense.  You also have fees associated with any additional rider guarantees to your variable annuity, such as GLWBs, GMABs, GMDBs, and GMIBs.  Now because of these fees, the author recommends fixed equity indexed annuities.  These indexed annuities don’t have any fees unless you add on riders like a GLWB.  They also protect all of your money in down markets and offer you the potential to earn some interest.

With that said, a comment from reader Michael Ham offers some additional insight to both products.  He points out that the spread of fixed equity indexed annuities is kind of like a fee.  One insurance company has a spread right now of close to 9%; Ham says that is essentially their fee for the indexed annuity product.  He says that the average variable annuity fees are lower than the article mentions.  With complete coverage and protection for the client’s lifetime and even added death benefits, fees would be closer to 3%.  He believes that variable annuities are best for investment purposes and long term portfolio growth.  Fixed equity indexed annuities are better for offering income and protection of your savings in his opinion.  While the author and commenter seem to have differing opinions on the two annuity products, I would argue that they have made strong cases for both.  That is the beauty of annuities; each version is best for a different kind of client.  Someone looking for the benefits of variable annuities has a different plan than the person using fixed equity indexed annuities for their retirement.

Written by Rachel Summit

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