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The 20 Year Evolution of Fixed Indexed Annuities

This year marks the 20th anniversary of fixed indexed annuities.  They have undergone a lot of changes during those two decades, some good and some bad.  In Insurance News Net Magazine’s article “Happy 20th, Fias!“, Editor-in-Chief Steven Morelli talks about the state of fixed indexed annuity products.  He summed it up well with the first sentence, “Fixed index annuities want what any 20-year-old desires: Acceptance and respect.”

Keyport Life introduced the first indexed annuity in 1995.  It was called the KeyIndex and it had 100 percent participation and a 150 basis-point spread.  People were excited about a product that protected your principal while exposing your money to potential gains in the stock market.  But Keyport Life promised too much and basically gave away free money.  They ran into reserve problems by the time that their first five year term was up and ended up being absorbed by Sun Life in 2003.  Many of the companies that sold the first indexed annuities are no longer around, but they certainly taught insurers a lot.  They paved the way for the fixed indexed annuities of today, which offer consumers a unique array of benefits that can’t be found elsewhere.

Years of low interest rates have hurt the insurance industry, but indexed annuities remain a good option compared to other safe money options like CDs and bonds.  Fixed indexed annuities can’t promise the rate growth that equities can, but equities don’t offer any guarantee on your money.  Unfortunately, another reason that indexed annuities saw a lot of growth over the years was because of marketing.  Some companies promised too much and worded ads in ways that were misleading.  There is now more regulation over the industry and organizations like FINRA have issued warnings to companies to avoid false advertising.  Companies were trying to offer extremely high rates, so they introduced very long surrender periods and high charges for cashing in their annuities early.  That coupled with some unethical selling to older consumers brought a bad reputation to the fixed indexed annuity industry.  Insurers are still working to regain their reputation with some consumers.

After the recession in 2008, the value of indexed annuity products became clear again.  Insurance companies and marketers realized the importance of simplifying some of the products and the message that they are trying to sell.  Consumers have trillions of dollars in retirement funds that they need to pay them income over their lifetimes.  The purpose of annuities is to help ensure that Americans do not run out of money.  Unfortunately, many Americans are scared of annuities because of some bad products in the past.  The best way for insurers to market annuities like fixed indexed annuity products is to offer simple, transparent products that meet the needs of consumers.  By delivering on promises to consumers, indexed annuities will be taken seriously as an important retirement tool and continue on their upward growth trend.

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