Indexed products, one of the hottest-selling categories in the life and annuity space, are on the minds of nearly every financial advisor working in the U.S. today. But how many advisors understand how they really work?
Floors … caps … participation rates … bonuses … spreads … point to point. Welcome to the lexicon of indexed annuities and indexed universal life insurance policies.
Welcome to the world of Kaplan Financial expert Randy Kemnitz, who was scheduled to deliver a presentation on indexed insurance products at the National Association of Insurance and Financial Advisors 2015 Career Conference and Annual Meeting.
The world of indexed products used to be a blip on the life and annuity landscape, but the past 15 years have seen them explode into the marketplace.
Fixed index annuities (FIAs), traditionally available through captive insurance agencies, are now offered through regional independent and wirehouse broker/dealers.
Sales of indexed annuities reached $47 billion in 2014, a 21.3 percent jump over 2013, according to Wink’s Sales & Market Report. In addition, FIAs make up about 21 percent of all annuity sales, according to the Insured Retirement Institute.
Indexed life sales grew to $1.56 billion last year, an increase of 15 percent over 2013, according to Wink.
“Growth has been exponential,” Kemnitz told InsuranceNewsNet in advance of his presentation.
“Carriers see potential for growth and are getting involved in indexed annuities and indexed universal life. The more carriers compete, the more they want to differentiate themselves.”
Retirees, whose numbers are growing by the thousands every day, need the income that retirement products provide. But income is not all retirees need. Faced with a shorter time horizon, retirees also need the security from the market downside.
In case anyone needed reminding, “the last few weeks have not been happy,” said Kemnitz, outlining a brief history of indexed products.
Indexed products, which have grown in number and volume, are here to stay, Kemnitz also said. But as they’ve gown, they’ve also become more difficult to understand as carriers trip all over themselves to differentiate their respective offerings from that of competitors.
Advisors, therefore, need to know how indexed products work.
“The more carriers compete, the more they want to differentiate themselves,” he said. Carriers have been quick to “credit this, disregard that,” within indexed product features, Kemnitz added, and that only means more complexity as different products promote different features.
“From an advisor’s and NAIFA’s perspective, it’s extremely complex and then you have to explain this product to consumer and that has led to a great deal of regulatory scrutiny,” said Kemnitz, who began his presentation with a history of indexed products.
The second part of Kemnitz’s presentation delved into the product features and how basic elements of indexed products work — an exercise bordering on actuarial science yet no less fascinating than the history of the product line.
Indexed products credit policyholders based on the performance of an index, and often more than one index. But as Kemnitz explained, an index isn’t just an index.
Indexed products used to be pegged to widely traced indices - the Dow Jones Industrial Average and the Standard & Poor's 500 index, -but these days as many as 30 indices are available for carriers to peg their indexed products to.
Indices, too, have become more complex that they used to be. “Thereare different ways of measuring the performance of an index over time,” Kemnitz said.
Carriers have different ways of measuring the performance of an index over time.
With the point-to-point model, carriers measure average performance from starting and ending dates over months or years. Other carriers sometimes measure performance based on the “high-water” mark of an index.
Other methods carriers use to measure an index involve resets based on performance averages, Kemnitz said.
The upshot is that where there formerly were only one or two moving parts to an indexed product, there are now five or six: the floor, the caps, the bonuses, the spreads, the indices.
Each indexed product contains its own peculiarities. Take the spread, for instance, a widely understood concept in finance. If the market goes up 12 percent, the contract holder with one particular carrier only gets 8 percent, but receives 10 percent with another carrier.
So spreads differ.
To make matters even more interesting, every feature of the indexed world doesn’t exist at the same time in the same product. Carriers insert or alter features at will, which means that advisors have to understand how that they work.
Then there are indexed product costs, which could be considered a science in and of itself.
After outlining the moving parts of the indexed world, Kemnitz briefed advisors about the regulatory environment surrounding indexed products.
Not surprisingly, the regulatory history of indexed products was also full of its own twists and turns.
From court rulings that indexed products were not securities despite earlier assertions by the Securities and Exchange Commission that they were, to FINRA guidelines insisting that broker/dealers should view indexed annuities as securities for the purposes of compliance and sales even though indexed products aren’t securities, it seemed at times as if Kemnitz’s presentation had more plot twists than an Agatha Christie novel.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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