By Cyril Tuohy
You can’t fault insurance carries for wanting to promote their products by using a little branding hyperbole.
Words like “secure,” “income” and “protection” figure prominently in the marketing materials of life and annuity companies. After all, that’s what life and retirement insurers are there for: to protect families from longevity risk and unexpected calamities.
Now, Nationwide has jumped into the mix with its New Heights family of indexed annuities (IAs) promising “uncapped earning” potential for investors. This time, though, it is worth asking how much income potential there is available to investors.
For years, indexed products were capped. The insurance company promised investors a return of, say, 3 percent or 4 percent. If the index like the Standard & Poor’s 500 returned 10 percent, 15 percent or even 30 percent as it did last year, the investors made the wrong call. They would have made a lot more without a cap.
That’s how insurance companies limited the upside potential of their annuity payouts. Now Nationwide has entered into a deal to distribute uncapped designs for IAs, providing another choice in the annuity product shelves of financial advisors who will sell them.
“New Heights offers uncapped earning potential, a rarity in the fixed indexed annuity world,” said Eric Henderson, senior vice president of life insurance and annuities for Nationwide.
In the strictest sense, the “uncapped earning potential” claim is true. The catch, though, is that it isn’t likely to apply to the whole indexed annuity investment. A percentage of the premium is always redirected into a fixed investment bucket, said Sheryl J. Moore, president and chief executive officer of Moore Market Intelligence.
“Every indexed product limits gains,” she said.
Don Dady, co-founder of Scottsdale, Ariz.-based Annexus Group, told InsuranceNewsNet that removing the cap on an IA is designed to “harness market volatility.” The higher the market goes, the higher the return, but only to that uncapped portion of the annuity.
Annexus’ “sophisticated pricing model,” is poised to take advantage of new opportunities created by the volatility in the marketplace, Dady added. The ultimate judge of how well this product will fare will be left to the investor and his or her advisor.
Demand for indexed annuities is up over the past two years as more retirees look to secure income in addition to the money they receive from Social Security, defined benefit and defined contribution retirement plan distributions.
Sales of indexed annuities rose to $10 billion in the third quarter, an increase of 15.1 percent compared to the year-ago period, according to Beacon Research. Year-to-date indexed annuities sales ending in the third quarter were $26.9 billion, up 4.7 percent compared to the same period in 2012, Beacon said.
Total indexed annuity sales in 2012 reached $33.9 billion, up 5 percent from 2011, according to LIMRA.
IAs are on a roll, helped by the stellar performance of the Standard & Poor’s 500 index which delivered investment returns of nearly 30 percent last year. Taking even greater advantage of market upside by removing caps will only give IAs more sales momentum.
Removing the cap isn’t new, and there are plenty of uncapped annuity products around. Uncapped annuities, however, come with plenty of caveats ranging from lower participation rates, spreads or margins, and even mandatory fixed bucket allocations.
All these exceptions “greatly hinder” overall IA performance, according to the blog Annuity Think Tank.
Annexus, a designer and wholesaler of annuities, has had an uncapped IA in the market since 2006 under a proprietary arrangement with Aviva. Adding Nationwide means Annexus now has two carriers with which it has proprietary IA arrangements.