In 2023, Fixed Indexed Annuities (FIAs) sales hit a record $95.6 billion (up 20% from 2022).
Why are FIAs booming? More people are turning 65 and are interested in asset preservation vs. growth. Also, the 40% (AGG) of a 60/40 portfolio has been awful the last 10 years. So, an asset that should return 3-6% over time with no risk of loss has become popular with consumers.
SEC Goes After Advisor Replacing High Surrender FIAs
If you didn’t read the SEC’s complaint on an advisor who allegedly replaced relatively new high surrender charge FIAs with new up-front bonus annuities, click on the following link:
https://advisorshare.com/cutter-sec-complaint
Billions of Underperforming FIAs
Even though billions of FIAs have been sold, many are what I call underperforming. Why?
1) Agents sold products from companies who have a history of dumping caps.
2) Billions were sold between 2019-2021 when interest rates were low.
Either way, there are many FIAs out there with 3, 5, and 7-year surrender charges with current caps at 3%, 4%, or 5%. What is the client to do? What is the advisor to do?
Does it make sense to transfer or 1035 exchange an FIA with a low cap or underperforming VCI (Volatility Control Indexes) with a new FIA priced at a time with higher interest rates and higher caps? I would argue that it will make sense if done “right.”
BONUS Annuities
The solution to fix an existing FIA with low caps within its surrender charge period is to use an FIA with a bonus. But this needs to be done with caution and significant documentation.
Example—client was sold an FIA 3 years ago with an initial cap of 6% and a current cap of 4% (assume a 5% surrender charge on a 7-year product). The client is upset. What do you do?
Solution A—use a 5% bonus FIA to cover the surrender charge. If we assume the new S&P 500 cap on the FIA is 10.75%, the math is essentially a no-brainer.
Solution B—use a 12% bonus FIA to cover the surrender charge (and potential mva charge). Because the S&P 500 cap will be 7%, you have to run the math to see if this option makes financial sense.
It’s great to have viable options, but the client will have a new/longer surrender charge. The pros and cons of this have to be weighed by the client and documented by the advisor.
All bonus annuities are NOT created equal. Some do NOT vest clients in the bonus upon death. Some have abnormally high surrender schedules. Just be careful when choosing product.
How to Tell if a Company is Likely to Dump Caps
While there is no magic wand to determine if a company will dump its caps, there are a few items that will act as a good indicator.
1) Does the company publish its renewal cap history?
Only ONE company with a 12% bonus publishes its renewal history going back to 2015!
To learn about this product, click on the following link:
https://advisorshare.com/88-percent-renewal-rate
2) Look at the cap history of products you’ve sold or ask the IMO to give you that data.
3) What’s the cap on its S&P 500 annual pt-to-pt product?
Why should you care how companies price out their S&P 500 pt-to-pt cap?
Every company takes in $1 of premium and uses that to create products and set cap rates. When using the S&P 500 for comparison, that works because all companies are hedging the SAME index.
For example, if Company A has its S&P 500 cap at 8% and Company B at 12%, that tells us a lot about how the company allocates money to build and sustain the product (like Company B is allocating more money toward its caps (vs. paying commissions, taking profits, etc.)).
What about VCIs? Some product lines at companies do not offer an S&P 500 crediting strategy (they instead rely on and market VCIs). It is extremely difficult to compare pricing on products using proprietary VCIs.
Annexus is a good example. Products designed by Annexus (my least favorite product line in the industry) do not offer an S&P 500 cap crediting method. Clients are stuck using VCIs or expensive S&P 500 par rates. How do you determine if the product is priced to keep caps high? It’s difficult.
We are having more and more advisors contact our IMO www.advisorshare.com to find alternative products to Annexus. Why? Because many sold products using the Mosaic and Zebra VCIs and they have NOT performed like their “back-tested” numbers. Agents contacting us have a upset clients, and I don’t blame them.
Historical Numbers of Mosaic and Zebra Indexes
To DOWNLOAD my 22-slide PowerPoint that has the numbers when using a 1-3-year Pt-to-Pt crediting where I compare Mosaic and Zebra VCIs to FIAs with good S&P 500 caps, click on the following link:
https://advisorshare.com/1-2-3-year-pt-to-pt
Summary on using bonus annuities when replacing existing low-cap products
There are legitimate reasons to replace an FIA with low caps sold from 2019-2021 in the low interest rate environment. There are legitimate reasons to replace a lousy FIA sold by a company that has a history of dumping caps.
What’s most important for advisors when selling an FIA is to dive into the pricing of the product and work with an IMO who does the same so you are making the best efforts to sell FIAs with companies that have a history of NOT dumping caps.
Roccy’s 2-Day Education/Marketing Seminar is Coming to Southern CA
To DOWNLOAD the Orange County, CA, agenda and sign-up form, click on the following:
https://advisorshare.com/orange-county-seminar
