Fixed index annuities want what any 20-year-old desires: Acceptance and respect.
FIAs still carry that bad-boy taint from years back, from, you know, the experimenting years. Yeah, things got a little complicated back then. Maybe they said some things they shouldn’t have. But we all grow up, right?
We do, but many of us also have trouble outgrowing certain bad tendencies.
It seems like just yesterday that a new, fresh annuity showed up singing a different tune. Before then, annuities were meant to be unexciting. When talking to clients about guaranteeing a safe income in retirement, “Woooooo Hoooooooo!” was not likely to enter into the conversation.
Then something interesting started happening on Feb. 15, 1995. That was when Keyport Life started selling KeyIndex, a product that seemed too good to be true: an annuity that could guarantee a floor, but also give clients upside potential based on the S&P 500.
In Keyport’s case, it was too good to be sustainable. John Olsen sold a few of them in the late ’90s.
“Horribly underpriced product,” Olsen said. “It was 100 percent participation with a 150 basis-point spread, which is free money.”
It meant that if the market went up 22 percent, the contract holder would get 20.5 percent. The first FIA ever sold did well for the 60-year-old client in Massachusetts. The $21,000 premium grew to $51,779 in five years, according to “Index Annuities: A Suitable Approach,” a book Olsen wrote with Jack Marrion.
By the time that five-year term was up, the company was running into reserving trouble. It was eventually absorbed by Sun Life in 2003. Many of the companies that sold the first FIAs are not among the living. But the idea gained more life year after year. InsuranceNewsNet and other news outlets trumpeted one record-breaking quarter after another.
These days, the product’s strong showing is a bright spot in what had otherwise been some dismal quarters following the 2008 crash.
Obviously, the perennially low interest rates have bedeviled the insurance industry in many ways, particularly in its ability to offer an attractive rate on annuities. FIAs can’t promise the high-percentage growth of the equities that they are most distantly linked to, but FIAs are usually among the best-looking options within the sensible-shoe crowd of CDs and bonds.
That rate edge might only be part of the reason for the product’s runaway success. The rest has much to do with marketing. Companies, marketing organizations and producers have done very well to attract buyers with creative messages.
Sometimes those messages and products have gotten a little too creative. Olsen said some companies were trying to deliver on an impossible promise.
“They were trying to be all things to all people – and they threw in the kitchen sink,” Olsen said. “They were trying to insure against mutually contradictory outcomes. One of which cannot possibly occur. They were saying if you keep it for 20 years, you can have the premium back, and if you died, you can have it back in a death benefit. You can’t do both.”
That promise led to some “creativity” in product structure and selling. Aggressive marketing led in 2005 to the Notice to Members (NTM) 05-50 from FINRA forerunner National Association of Securities Dealers (NASD). It had cautioned against marketing phrases such as “Growth Potential Without Market Risk” and a “Win/Win Investment Vehicle.” In truth, many of the examples did not look all that misleading. After all, the products did offer the potential for growth without the risk of being directly in the market.
Perhaps enthusiastic marketing itself was “tawdry” for insurance, the province usually of boiler-room, penny-stock hustlers. Maybe the kneejerk of turf protection from the securities world played a part as well. Either way, the products, then known as equities-indexed annuities, were catching a bit of unwanted attention.
Index annuities became convoluted, largely in order to offer tantalizingly high rates. To invest long term and ensure the higher rates, insurance companies had to discourage contract holders from surrendering annuities early. Enter complicated products with 15-year surrender periods and double-digit penalties.
Combine that with some aggressive selling to prospects in their 70s and 80s and you had the makings for public revulsion. That helped propel the Securities and Exchange Commission in 2008 to establish Rule 151A, which claimed FIAs as securities.
In a remarkable lobbying campaign, the industry fought back to not only have Congress toss the rule but also to have a federal court rule against it. It was a double whammy that whacked a silver stake into the rule.
Then the recession once again showed the product’s resiliency and value. Companies and marketers also learned to simplify the annuities and message.
Not all of them, of course. These days, organizations such as the National Association for Fixed Annuities (NAFA) that fought for FIAs are concerned new creative products and messages will again draw reactionary rulemaking. The latest is “uncapped” strategies that have caught some consumers’ eyes. Annuity analysts such as Sheryl Moore of Moore Market Intelligence say that those products are built so they will have the same result as pretty much any other FIA. Regulators are already issuing warnings.
The regulatory warnings are unlikely to build into anything like the storm that led to 151A, but they are not helping the products just when they are needed most.
In this magazine edition is a main feature showing the huge amount of money that consumers are trying to preserve for retirement – about a half a trillion dollars each year. Annuities should be the leading method for people to ensure that they do not outlive their money. That, after all, is the annuity’s reason for being.
But consumers are frightened of them. And even when they get them, very few hold them to annuitization.
How will the FIA be taken seriously as a retirement vehicle? The same way in which any 20-year-old shakes a bad rep: Make clear promises that they keep, time after time, year after year.
Steven A. Morelli