A Historical Perspective On Indexed Life And Annuities Products

By Cyril Tuohy

InsuranceNewsNet

How is it that indexed products — universal life and indexed annuities — have muscled their way into the market and shot to the top of the sales charts? After all, these were offerings that barely existed little more than 15 years ago.

In 1995, indexed annuity sales were $100 million, a mere blip on the annuities market landscape. Fast-forward 17 years and indexed annuities racked up $34.2 billion in sales by the end of 2012, according to data compiled by Advantage Compendium.

In the 12-year period ending in 2012, sales of indexed annuities grew at an annual rate of 16.5 percent, according to the fourth quarter 2012 U.S. Individual Annuities Sales Survey conducted by LIMRA. Fixed indexed annuities now make up 51 percent of all fixed annuities compared with 49 percent for traditional fixed annuities, which pay holders a steady stream of income, usually in return for a lump sum investment up front.

Annual sales growth of indexed universal life products have grown 28.7 percent since 1996, according to LIMRA’s fourth quarter 2012 U.S. Individual Life Insurance Sales survey, and indexed universal life now makes up 30 percent of all universal life product.

What happened? Plenty, starting with the great bond market massacre of 1994. That’s the year when interest rates spiked 1.5 percent over the course of 12 months. Investors came to the conclusion that nothing was safe anymore.

Enter the fixed indexed annuity in 1995, followed two years later by the indexed universal life product. The products guarantee that investors will not lose any of their investment solely as a result of a market decrease. In exchange, investors give up potential upside gains if the markets take off.

“They were created to combat market volatility and financial instruments yielding very low numbers,” Charlie Gipple, national director of indexed products with Genworth Financial, said in an interview with InsuranceNewsNet.

That is a situation not unlike the one we face today: bank certificates of deposit yielding ultra-low interest rates and a stock market with gut-churning swings.

The nation’s $16.73 trillion public debt  has, at least in the minds of taxpayers, also practically guaranteed that taxes have only one way to go: up. The tax deferral benefits of owning indexed products make them that much more attractive.

More than a third of Americans nearing retirement think they have enough money to retire on and more than three quarters say they will have to work longer than expected because of a lack of savings, so indexed life and annuities products offer a solution.

With what some people see as a looming “retirement crisis,” pre-retirees can’t afford to lose the savings they have. But, as retirees, they can benefit from more income, should it come their way thanks to a generous stock market, even if that income is capped.

Financial advisors, Gipple also said, like indexed annuities because they are simple and relatively easy to explain, and because product enhancements – guaranteed life withdrawal benefit riders, for instance – and regulations “have come a long way,” over the past decade.

With fixed indexed products such as these “it’s not about the amount of return on your money, it’s about the amount of money you are getting the return on,” he said.

Fixed indexed products have their detractors, including widely published columnist Walter Updegrave. The multitude of flavors that fixed indexed annuities come in makes it difficult for investors to compare one fixed product to another, according to Updegrave.

Other experts say it’s important for investors to know how insurance carriers limit an indexed annuity’s potential gains, and any surrender charges.

With more than 15 years of history behind them, indexed products have been tested by bull and bear markets and recent research appearing in the Journal of Financial Planning finds that annualized returns for fixed indexed annuities compares favorably to the S&P 500.

The S&P 500 indexed return from 2005-2010, was -1.47 percent, compared with an average return of 3.89 percent for 36 fixed indexed annuities over the same period, according to Geoffrey VanderPal, former chief investment officer of Skyline Capital Management; Jack Marrion, president of Advantage Compendium, and David F. Babbel, professor emeritus of insurance and risk management at The Wharton School.

“Our rather modest conclusion is that some indexed annuities have produced returns that are competitive with other asset classes such as equities and equity/T-bill combinations,” the experts wrote in the article, “Real-World Index Annuity Returns.”

Gipple said the real issue is whether indexed products have done what they were supposed to do when they were launched in the mid-'90s. “They’ve done more,” he said. “They are designed to beat the bank and fixed instruments, not the stock market.”

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].