Why Indexed Annuity Rates Are Cold but Sales Are Smoking Hot

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Annuities, like many other retirement income vehicles, are commoditized and often sold based on the rate being offered to the purchaser. For example: let’s say a bank is offering a fixed annuity or certificate of deposit (CD) with a credited rate of 2.50%. Interestingly, their competitor across the street is offering a rate of 2.55% on the same retirement savings product. Who do you think is going to get the business?

You get the point.

Although fixed annuities offer insurance benefits that a CD does not, these products are typically sold in the same manner. There is little regard beyond the credited rate for features such as death benefits, liquidity options, and guarantees. Many don’t take the time to discuss these features with the credited rate being the primary focal point in the sale.

Indexed annuities, a type of fixed annuity that earns limited interest based on the performance of a stock market index, were once perceived as “complex.” This reputation was earned as a result of the products offering 50+ different indexed crediting methods, from which annuity owners could choose to calculate their indexed gains. There was very little chance of these products ever becoming a commodity as a result. Insurance agents shrank when attempting to make a decision on which crediting method to use. Most gave up on attempting to learn ALL of the different ways to calculate indexed interest on the annuities. If they merely learned to calculate a few of the countless crediting methods on the market, they would be doing pretty darn good. As fate would have it, regulatory issues and product trends forced a downsizing on the number of these methods that were available. Today, there is only a choice of 12 different crediting methods upon which to calculate your indexed gains on these annuities. And quite unexpectedly, these index-linked savings products have now become just as commoditized as CDs.

Why? Although the dramatic decline in the number of crediting methods was a positive move for the industry, it also reduced the number of choices available on these products. (I don’t think anyone is going to complain, considering how simple the products have become!) However, when coupled with the historical-low interest rates that have become predominant over the past four years, it is impossible for any indexed annuity product to avoid becoming “just like the competitor’s product.”

And just how low are indexed annuity rates? REALLY low. Back in 2008, the average cap on an indexed annuity’s annual point-to-point crediting method was 6.86%. Insurance agents found those rates to be paltry and undesirable and subsequently had difficulty closing sales. After all, when your career has been spent selling on rate, how can you change your process to focus on other product features in times of depressed rates? They wanted the chance to give their prospects double-digit returns on these “safe money” products. However, if they thought caps back then were measly, they’d faint over the caps that are available today. The average comparable cap on indexed annuities is presently a meager 3.32%. How do you make THAT value proposition? “If you buy this annuity, you’ll never earn less than 0.00%- even if the market declines. However, if the S&P 500 increases 10.00%, you may earn as much as 3.32%!” (And you wonder why agents are no longer selling based on rates!) This tremendous drop in rates has left some financial professionals out-in-the-cold.

And yet, indexed annuity sales have hit record levels for the past four years; reaching $32.3 billion in sales at the close of 2011.

What gives? Value. Indexed
annuities offer so many more benefits above-and-beyond the potential for gains. In a market where caps are lower than the rates being offered on fixed annuities, these features have come to the forefront of the sales process.

The guarantees of indexed annuities, so little discussed but so invaluable, are the primary driver for sales today. To savers who lost money back in 2000, the guaranteed return-of-principal that comes standard in indexed annuities is invaluable. To those who lost not only their principal investment, but also their gains in 2008, the indexed annuity’s guaranteed protection of gains is a Godsend. Every individual that buys an indexed annuity today is guaranteed that their beneficiaries will receive the full value of the annuity upon their death; without the application of surrender penalties. Those who need the ability to access their annuity’s cash buildup, they are guaranteed the ability to withdraw 10% of the contract’s value each year without penalties (after the first policy anniversary).

And if these guarantees are not good enough, I can give you another that is unmatched by any other financial services instrument offered today: a guaranteed paycheck for life, regardless of how long you live. According to a recent article published in a reputable, national magazine, the first person to live to be 150 years old is already walking the earth today.  TODAY! Furthermore, medical advancements will ensure that we will have the ability to live forever within the next 20 years. Now, if that doesn’t scream, “I need guaranteed lifetime income,” I don’t know what does.

It is the guarantees of indexed annuities that make them an invaluable part of Americans’ retirement portfolios – not the potential for gains. Financial services professionals that are selling indexed annuities have already figured this out. After all, the 3.32% cap sure isn’t selling it! With many more of these professionals turning to indexed annuities as a potential solution for their clients, sales of these products are going to remain HOT for years to come.


Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.

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