Annuity Rate

Index Annuities - Critical Features

I think insurance companies misrepresent index annuities (and know better) and so do agents (many do not know better).

I sold my first index annuity in 1996 so I guess I'm an "old timer" at it. There are 3 features that are critical so that you do not anger your client and also get them the best deal:

Insist on a fixed participation rate for the entire annuity term. Some companies may provide 100% participation today, but if they change that to 50% next year, just watch your clients scream. I highly advise you to use such products carefully (or not at all)!

Try and use an annuity with an Annual Reset—especially with senior clients, you want to protect their gains. Without the annual reset feature, you cannot protect one year's gain from the next year's loss. There's nothing worse than when Mrs. Jones makes 30% one year and loses it back the next. She may as well just be in a variable annuity or in a mutual fund.

Averaging of the S&P — while most insurance companies tell you this is a good feature for your client, it's not. It dilutes the return. However, it's getting nearly impossible to find a product that doesn't use averaging. I have NEVER seen a product that has annual reset that does not use averaging.

Based on an analysis of periods over the last 30 years (see attached page), an index annuity with a 55% participation and no averaging will do about as well as a 100% participation, with averaging. However, from the client's view, the 100% sounds better.

The best performance will come from the riskiest arrangement:

A point-to-point design with no averaging.

Any type of annual cap will KILL the client’s return.

Why is this? Because most people don’t realize that the big gains in the stock market are produced by 2 or 3 years out of 10. If you remove those big gain years by capping them, the performance dives (so avoid index annuities with annual caps). Averaging of the S&P 500 reduces those big gains. And since index annuities already protect the original principal, there can be no argument that averaging provides any value in down markets.

The client will not earn anything near what the stock market delivers. To infer that will leave you with many irritated clients and maybe lawsuits. Index annuities will deliver about 50% of stock market returns. So if the stock market has delivered a 12% return over time, figure an index annuity (with the averaging feature) will deliver 6%.