Indexed annuities have been the big topic of financial news lately. Although they have been around for 2 decades, they are receiving a surge in popularity now because of continuously low interest rates. Investment News’ Darla Mercado discussed how “Indexed annuities gain popularity while rates remain low.” The tumultuous bond market back in 1994 really led to the birth of indexed annuities. While we’re not in the same situation now in 2014, this unique financial marketplace is perfect for indexed annuities as well.
The earliest indexed annuities were not particularly easy to understand, came with long surrender periods and high penalties for withdrawing money early. Two-tiered indexed annuities came about as a solution to the complex earlier version of the products. These annuities offered competitive interest rates during accumulation and a premium bonus if the client annuitized after the deferral period. A lot of clients are hesitant to annuitize because they turn their principal over in exchange for a stream of payments. Over time, indexed annuities have evolved so that they are more appealing to consumers and easier to understand. Broker dealers came out with their own set of standards after two-tiered indexed annuities drew negative attention. They adopted the 10/10/8 rule where surrender periods must be less than 10 years, surrender charges must be less than 10%, and broker commissions must be less than 8%.
Low interest rates have been a thorn in the side of financial advisors over the past couple of years. Indexed annuity benefits make them a great investment because they offer both a fixed guaranteed interest rate and tie an additional opportunity for interest to a market index. There is a limit when it comes to this added interest because your return can be capped and have a participation rate assigned by the insurance company. Even with the participation rate and cap though, indexed annuities are offering higher returns than many other investments. Raymond James Financial Inc. saw their fixed indexed annuities sales increase 60% during their fiscal year 2013, to $330 million. LPL Financial’s sales increased 15% through the third quarter of 2013, up to $649.4 million.
Another reason that people are flocking to indexed annuities is for their lifetime income benefits. As variable annuity providers back away from these lifetime income riders, more indexed annuity providers are adding them as options for clients. These living benefits are a big draw for consumers who are worried about outliving their life savings. A recent study showed that 70% of indexed annuity sales had a lifetime withdrawal benefit attached. With all of the changes that have occurred in the indexed annuity market over the past couple decades, these products are more desirable than ever to consumers. There are some indexed annuities available with great bonuses, lifetime income, and death benefits. This is a good economic climate to take advantage of the benefits that indexed annuities have to offer. Speak with an expert if you think that indexed annuities might be a good addition to your planning.
Written by Rachel Summit