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Advisors Must Know This List About Indexed Annuities Before Recommending


All of the recent fixed indexed annuity news has been in regards to the product’s inclusion in the DOL fiduciary rule. Now that we’ve all adjusted to the surprise of indexed annuities being lumped with variable annuities under the BICE requirements, it’s time to determine what changes need to be made in the buying and selling of fixed indexed annuities going forward. Investment News’ Greg Iacurci wrote about “How to sell fixed indexed annuities in a DOL fiduciary environment” in an article earlier this month. The first thing advisors will have to do is look at the exact wording in the fiduciary rule. Much like advisors do with other insurance products and investments, they have to take a so-called “rigorous approach” before recommending indexed annuities.

Many people say that a good advisor would have already had their clients’ best interest in mind. While this is true to a point, these new BICE requirements will really put the customers’ needs at the top of advisors’ minds. The Department of Labor offered a list of all of the things advisors must consider about a fixed indexed annuity before recommending it to their clients. They must know any surrender charges and the terms associated with them, if there are interest rate caps, which market index or indexes the annuity is linked to, and if there is any downside risk with the investment. They also need to understand any administrative or other charges, whether the insurer has the right to change any of the terms or charges during the contract period, the detailed method that is used to get the index-linked interest rate, and whether or not there are optional riders like death benefits or living benefits. Some of these things are easier to determine and simpler than others to explain, but the DOL is clear that advisors must understand all of these nuances about fixed indexed annuities.

The industry is waiting to see what is going to happen now with fixed indexed annuity sales. Their sales have been surging recently, with sales of $55 billion in 2015 breaking records. 2015 was the 8th straight year that indexed annuity sales grew. On the flip side, variable annuity sales have been declining for years, even though they are still 2.5 times more than indexed annuities. Most people figured that indexed annuities would just soak up the increased loss in variable annuity sales after they were subjected to the DOL fiduciary rule BICE guidelines. But that’s because most people thought that indexed annuities would be exempt from BICE guidelines under the Prohibited Transaction Exemption. Experts are unsure of what the inclusion of indexed annuities in the BICE rules will do to indexed annuity sales and even to variable annuity sales. The latter may not take as hard of a hit as originally forecasted. One company watching this closely is American Equity, who earns 95% of their money from sales of indexed annuities.

Indexed annuity supporters aren’t necessarily surprised that the DOL included their products in the fiduciary rule, but they are disappointed on many accounts. Sheryl Moore pointed out that the DOL doesn’t seem to have done much research on the terminology used in their requirements. She said that the DOL included the “high water mark” interest crediting method in their documents despite that fact that insurance companies haven’t used that method in a long time. She hopes that the DOL did their homework before including indexed annuities in the BICE requirements. There is a detailed list of information that advisors must now consider before recommending fixed indexed annuities to their clients. The industry is watching to see what will happen with indexed and variable annuity sales in the years to follow the DOL fiduciary rule.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+


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