Banks, B-Ds Shorten Indexed Annuity Surrenders

Sales of indexed annuities with shorter surrender periods racked up big gains as more annuities are sold through banks and broker-dealers, first-quarter data show.

Banks and broker-dealers prefer shorter surrender periods because they come with lower commissions, which often means higher rates and caps for the client.

“We’ve seen stuff going over to banks and broker-dealers more and more, and with banks and broker-dealers, the five to seven-year surrender charge is the sweet spot,” said Sheryl J. Moore, CEO of Wink Inc., publisher of Wink’s Sales & Market Report. “The 10-year sales have never been lower in over a decade.”

At one end of the spectrum are indexed annuities with no surrender charge and at the other end is one that comes with a 16-year surrender charge.

1Q Sales Summary

Surrender charges, aka early withdrawal penalties, are designed to dissuade contract holders from turning the annuity in early and shorter surrender periods mean lower commissions for agents. The charges allow insurers companies to recoup their commissions paid upfront to advisors on the sale of a commission-based contract. Charges are typically pegged to a sliding scale with higher charges in the earlier years and lower charges in the later years, before disappearing altogether.

In the first quarter, Wink reported that compared to the year-ago period:

• 10.2 percent of indexed annuities were sold with a five- or six-year surrender period in 2018 compared with 9.1 percent.
• 26 percent of indexed annuities were sold with a seven-year surrender period compared with 22.1 percent.
• 42 percent of indexed annuities were sold with a 10-year surrender charge compared with 43.3 percent.
• 2.7 percent of sales were sold with a surrender period of 15 years or more, compared with 4.1 percent.

Market Share Shift

After a period of slower sales, indexed annuities regained momentum and sales rose 10 percent to $14.2 billion in the first quarter compared to the year-ago period. Sales rose 4.4 percent when compared to the previous quarter, Wink reported.

In the first quarter, 36.6 percent of all indexed annuities were sold via banks and broker-dealers, Wink reports. Banks and broker-dealers were responsible for 34.5 percent of indexed annuity sales at the end of last year, up from 7.7 percent in the fourth quarter of 2012.

By contrast, independent insurance agents were responsible for 59 percent of indexed annuity sales at the end of last year compared to 87 percent at the end of 2012.

The fact that independent agents are still selling indexed annuities at a healthy clip while at the same time ceding market share to other channels is possible because the indexed annuity sales pie as a whole continues to grow, Moore said.

Agents still sell between $6 billion and $10 billion worth of indexed annuities every quarter.

Independent agents’ market share of indexed sales fell below 60 percent in each of the four quarters in 2017, the first time this has happened in a calendar year since indexed annuities were created more than 20 years ago, Wink reported.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may 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].