A Quick History
This became especially clear
after the stock market correction in 2001.
A Switch And Then Enter Rule 151A
How Did The Mainstream Indexed Annuity Industry Respond
Changing the name from Equity Indexed Annuities (EIA) to Fixed Indexed Annuities (FIA) and then making them look more like equity products then ever with the rise of the fee based income rider. Fees in fixed annuities! Who could have asked for this?
The FIA marketing is now all about the income riders. Roll-up rates, bonuses and the allure of lifetime income all in bright flashing lights. Little to no mention of the minimum guarantees and annuitization rates which are the strongest guarantees in a fixed annuity contract. These minimum guarantees need to be detailed to the client especially with all the "8% annuity return" type of flash ads seen on financial pages on the web. Roll ups have been presented and sold as guaranteed rates for some time and death benefits misstated. THIS IS SERIOUS! A suitability issue as far as I can see and it really needed to be spelled out to clients in dollars when they started the contracts. Income rider sales should not be anywhere near as simple as a immediate annuity (SPIA) or Multi-Year Guarantee Annuity (MYGA) presentation. Income riders and how they interact with actual premium and accumulation values is not easy to get off the bat. Terminology and the multiply applications for the word "guaranteed" can get confusing for the most experience fixed annuity provider. These should be hours long conversations, no less.
Are We Are Headed Down The Same
The higher/longer surrender charges of FIA's is what the negative press has been focused on in the past. Recent FIA designs are much more confusing and that is troubling. The roll-up rate and payout percentages are expressed as guaranteed. To a client it could easily seem like a 7% roll-up guaranteed for 10 years is a true walk away cash accumulation value of 196.72% of premium. The client may not understand to get that 196.72% in their pocket even at a 5% lifetime payout rate would take 30 years after issue. Cut that to a 4% rate and now that client just waited 35 years. So, is the money really almost doubling in 10 years for this client or is it really taking 30 or more years? To a client who expected to walk away with the roll-up rate as a yield/gain it will be a tough reality to actually get from 0% to 40% of what they were expecting as a lump sum.
In an FIA with a rider the fees are taken from the actual cash accumulation value of the owner. Those are REAL dollars that the insurance company is taking today whether or not the client gets a chance to use the lifetime income down the road.
What is that income going to be worth and how much is given up? In the end a client with $1,000,000 may give up more than $90,000 in fees just to take the cash accumulation value in 10 years to buy a SPIA for more income than the rider would have kicked off.
Comparisons Using Math & The
That same male with a $100,000 in a MYGA at 3.40% for 10 years would grow to a $139,702. Using current SPIA rates the income to the now 65 year old male would be $664.83 per month for life with 20 year certain.
So that $196,715 for argument purposes is only really worth $139,702 if the payout factor is 4%. For the 5% payout a SPIA today would only need about $160,000.
Best Client For An FIA Rider
Understanding that since fixed annuities are insurance contracts the majority of any risk should be placed on the insurance carrier not the insured. The big winner I feel will be the insurance carrier in the end. They are taking fees for guarantees they always really offered while placing more risk on the insured.
My biggest problem with income riders are the fees. The accumulation value can go backwards and that is not why we sell fixed annuities. I am pleading with the insurance industry to keep fees out of MYGAs and SPIAs. Those products are easy and help people so let's leave them alone please.
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Last modified: 04/01/15