Indexed Annuities – A Tortoise and Hare Analogy

This  sales piece by the annuity marketing group Wealthvest featured on Annuity Think Tank likens investment to the story of the tortoise and the hare:

  • The S&P Index is the volatile hare, given to fast sprints but sudden naps.
  • An Indexed Annuity, like the reliable tortoise, keeps on going.

The chart shows that if your money is on the hare (blue line), you are clearly taking a risk. But if your money is on the tortoise (red and green lines) you’ll have consistent returns without any losses. That’s because a Fixed Indexed Annuity, locks in returns each reset period to eliminate the possibility of negative returns.

A Brief Explanation of Indexed Annuities: While most fixed annuities only credit interest calculated at a rate set in the contract, equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked, such as the S&P500. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of the particular annuity.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.

For example, many single premium annuity contracts guarantee the minimum value will never be less than 90% (100% in some contracts) of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The value of the annuity is adjusted at the end of each term to reflect any index increases.

More of the features Equity-Indexed Annuities provide are shown here.

Annuity Sales Decline As Indexed Annuity Sales Rise.

When it comes to sales trends, as well, the tortoise has been outrunning the hare.

A report by Juliette Fairley of Insurance Networking News, May 21, 2012 shows that total annuity sales dropped 8% in the first three months of 2012 compared with last year. “The combination of persistent low interest rates and high volatility is a challenging environment for the annuity industry,” said Joseph Montminy, LIMRA assistant vice president of annuity research.

LIMRA, previously known as Life Insurance Marketing and Research Association, found:

  • Fixed annuities dropped 10% in the first quarter to $18 billion.
  • Variable annuity sales dropped 7% to $36.8 billion.
  • Indexed annuities jumped 14% to 8.1 billion in sales.

Living Benefits Riders Have Been Popular

The GLWB rider, which may be elected at purchase, offers the ability to receive guaranteed lifetime income without requiring the owner to annuitize the contract.  According to LIMRA data, variable annuities sustained overall sales the past eight quarters with variable annuity guaranteed lifetime withdrawal benefit (GLWB) election rates at 90% during the last six months. In the third quarter 2011, the election rate was 88%, .

Indexed Annuities Are A New Darling

Kim O’Brien, National Association for Fixed Annuities (NAFA) president and CEO explains, “Indexed annuities are just fixed annuities with a different manner of crediting interest. This potential for additional interest is increasingly important in today’s low-interest environment. The rate of interest on indexed annuities may vary depending on the index performance but can never fall below zero.

For the third-consecutive quarter, indexed annuities outperformed traditional fixed annuities, capturing 45% of the fixed annuity market and jumping 14% to 8.1 billion in sales.

Who Sells Annuities?

MetLife was the top seller of annuities with $5.5 billion in sales, while Prudential was the top seller of variable annuities with $4.9 billion in sales, followed by Allianz Life of North America, which sold $1.4 billion in fixed annuity sales.

The Top 20 Writers of U.S. Individual Annuity Sales during the first quarter of 2012 include:

  • MetLife
  • Jackson Life
  • Prudential Annuities
  • AIG Companies
  • Lincoln Financial Group
  • Allianz Life of North America
  • AXA Equitable
  • New York Life
  • Riversource Life Insurance
  • Nationwide
  • Pacific Life
  • Aegon
  • American Equity Investment Life
  • Thrivent Financial for Lutherans
  • Great American
  • Protective Life
  • Fidelity & Guaranty Life
  • Principal Life Insurance.

“We believe the focus of the Presidential administration and current politicians’ positions on annuities and preparing for retirement along with the Department of Labor’s interest in annuity payout disclosure and the opening 401k market to annuities are all strong indicators that fixed annuity sales will be a growing part of America’s retirement going forward,” O’Brien said.

The Snap! principle of Equity-Indexed Annuities:

Slow and steady wins the race