Indexing the market: Driving life, annuity sales

Americans love the idea of participating in the stock market, especially when they’re not risking any losses.

That is a true win-win, and is the concept driving indexed products to spectacular sales of both annuities and life insurance.

On the annuity side, insurers who viewed indexed trends skeptically are rushing products out to join the sales frenzy. Indexed annuity sales totaled $59.3 billion through the first half of 2024. By comparison, $55.5 billion worth of indexed annuities were sold for the entire year in 2020.

Indexed annuity sales are on pace to rise 20% over last year’s record-breaking numbers.

Life insurance is a little different story. Whole life remains the dominant product, although in a sales decline, and term life remains a source of quick, direct-to-consumer sales. But Sheryl Moore, CEO of Wink Inc. and Moore Market Intelligence, is projecting record sales of indexed life insurance.

“It is the fastest-growing segment of the life insurance market,” Moore said earlier this year.

Beyond sales numbers, the indexed universal life insurance market continues to attract big-case sales as well as critics from across the industry.

Those criticisms are among many threats to the indexed sales phenomenon. The industry has no control over some challenges, such as an interest rate cut from the Federal Reserve, an action expected to take place after this issue went to press.

“The market is expecting multiple rate cuts from the Fed this year,” said Michael Normyle, U.S. economist for Nasdaq, during a recent webinar. “Close to three cuts is what markets are pricing currently.”

The time is (economically) right

Indexed products sit squarely in the sweet spot amid an equities market that is robust but also prone to turbulence and uncertainty, a massive market of retirees and near-retirees, and rising interest rates.

“Right now, the rates are absolutely fantastic,” Moore said in late August. “You have to remember that we’re coming off of a historically low interest-rate environment and everybody’s kind of high on these caps and participation rates because they’re so attractive. It’s a lot easier sale than it typically has been in a long time.”

John Foard is a certified financial planner and co-founder of Crown Advisors in Mooresville, N.C. He does not recommend indexed products for every client. With no downside, they are a good fit, though, for those who shy away from risk, Foard said.

But for many others, an indexed annuity or IUL product is the right answer in the present economy. Interest rate spikes, especially in indexed annuities, whenever there is market volatility, Foard explained. People remember the market wipeout in 2008-09, and even Black Friday in October 1987.

“You could argue the decision to implement an indexed product, such as an annuity, to protect one’s assets after a major market correction or bear market is the result of fear or emotion,” Foard said.  “Nonetheless, when an individual or family sees a major portion of their life’s savings wiped out in a fraction of the time it took to accumulate it, it creates fear of the unknown.”

The Federal Reserve adjusts the federal funds target rate range in response to changes in the economy. Manipulating rates helps the Fed satisfy a dual mandate to keep prices stable and maximize employment.

After a long period of near-zero rates, the Fed got busy in early 2022. Over a 16-month period, Fed Chair Jerome Powell announced 11 rate hikes taking the fed funds rate from 0.25% to 0.50% to 5.25% to 5.50%.

One by-product of the rising-rate environment is an eagerness to exchange annuities for better yields.

“There has been a ton of replacement activity in the annuity market,” Moore said. “There are S&P 500 caps out there of 3.5%, and it almost seems like a crime to not replace it with a product that has a cap of 9%.”

Insurers meeting the need

The indexed market is not lacking for products as insurers engineer new indexes and new products to meet the need. Four new accumulation-oriented IUL products hit the market within a few weeks in August.

On the annuity side, insurers are realizing that structured annuities — also known as registered indexed-linked annuities — are not just a passing fad. Many companies that were big in the variable annuity space have pivoted to structured annuities.

Jackson Financial is one example. Once the No. 1 seller of variable annuities, the company endured a financial downturn along with the product line. Jackson engineered a comeback on its Market Link Pro RILA suite, introduced in late 2021.

RILAs were introduced in 2010 by AXA Equitable Life Insurance Co., now known as Equitable, but it took some time for RILAs to catch on. RILAs hit $2 billion in sales by 2014, the year that Allianz, CUNA and MetLife introduced RILA products.

During the first half of 2024, LIMRA lists 19 sellers of indexed-linked annuities, accounting for nearly $31 billion in half-year sales.

“I think that we’re going to continue to see more players enter the structured annuity space, even insurance companies that don’t have variable annuities,” Moore said. “When Athene hopped in there, that was a surprise. When F&G hopped in there, that was a surprise. Because these were companies that didn’t have VAs.

“So, I think we’re going to continue to see new players hop in, and I don’t see the growth slowing down anytime soon.”

American Equity’s IncomeShield 10 was the No. 1 selling indexed annuity, for all channels combined, during the second quarter, Wink reported.

“They’re hitting the top of the spreadsheets for income. So, that’s really what our industry has come down to when we’re talking independent insurance agents,” Moore said. “American Equity has just been killing it. They’ve been at the top of the spreadsheets for some time. Their pricing is attractive.”

How informed are consumers?

While strong sales are good news for agents, insurers and everyone in between, the critics of indexed products are not going away. “Zero is our hero” is a marketing slogan used to promote indexed annuities and remind consumers that they won’t lose money with the zero floor.

That concept works well in a mediocre or down market. But the Dow Jones Industrial Average has more than doubled from its pandemic low of 19,200 and rose about 10% in the first nine months of 2024.

The caps and participation rates on most indexed products limit growth. Typically, annual caps on indexed annuities range between 4% and 8%, although the exact cap can depend on the insurer, the type of index and the specific product.

Likewise, once funds are committed to an indexed product, they cannot be retrieved without paying a surrender penalty. Consumers need to know what they are getting into, Foard said.

“You are committing your funds to that insurance company’s specific product for a minimum specified amount of time, such as seven to 12 years, depending,” he explained. “This means you are unable to leave that product or company for the stated number of years without incurring a penalty to do so, and the penalties can be rather steep — especially in the earlier years.”

Indexed products are often confusing even for financial professionals, said Michael Collins, financial advisor and founder and CEO of WinCap Financial.

“Clients that I would not recommend indexed products to include individuals who are seeking immediate growth or guaranteed returns on their investments, as well as those who have a low risk tolerance and are not comfortable with potential market fluctuations,” Collins added.

Illustrated concerns

The confusion that comes with indexed products is rarely helped by accompanying illustrations, critics say. Rather than helping clients understand, or at least showing them a realistic expectation, illustrations often do neither.

“I have some products that are illustrating a linear 15% guaranteed annual return, and I’m just like, ‘Yeah, that’s not guaranteed, but that’s just insane,’” Moore said. “Nobody should buy an indexed annuity thinking they should get 15% every year, but it’s happening.”

The issue with illustrations is the same for both indexed life insurance and annuities — unrealistic projections — but is playing out differently.

On the annuity side, the National Association of Insurance Commissioners adopted the Annuity Disclosure Model Regulation in 2012. Section six covers illustrations for fixed and fixed-indexed annuities with nonguaranteed elements.

However, only 10 states have adopted the specific section dealing with annuity illustrations.

“Greater adoption across more states would ensure more consistency in how carriers approach annuity illustrations, providing a uniform standard that benefits both consumers and the industry,” said Mike Considine, executive vice president and head of U.S. government and regulatory relations for Athene.

Considine and Adam Politzer, chief product officer for Athene, joined a Life Insurance and Annuities Committee meeting to talk about annuity illustrations during the NAIC summer meeting in August.

“I feel like with illustrations, there’s a gap between what I’m hearing from consumer representatives and insurance companies that’s more significant than what I would otherwise expect, and I can’t quite figure out why,” said Michael Humphreys, Pennsylvania insurance commissioner. “I’d like us to be comparing illustrations with the same basic premise so we can all agree on whether they pass or fail, but we’re not there.”

IUL in court

Problems with IUL illustrations are being fought in court more so than in front of regulators. IUL is often part of complex premium financing deals with large amounts of money at stake. Several of these deals have gone bad and led to lawsuits.

In other situations, internal costs can cause an IUL account’s value to drop substantially. That puts a policy at risk of lapsing, and the policyholder is on the hook for higher premiums—sometimes significantly higher premiums—just to keep the policy intact.

The common thread with IUL lawsuits nationwide is the illustration presented to buyers.

Actuarial Guideline 49 was adopted in 2015 to address IUL products created after the original 1997 illustration model was adopted. Insurers quickly got around it by offering IUL products with multipliers and bonuses.

That led to AG 49-A in 2020 and, eventually, AG 49-B. Regulators referred to the latter update as “a quick fix” when adopted in 2023.

Moore called on the NAIC to reopen and amend model regulation 582, which covers life insurance illustrations. Regulators are not eager to take on that fight, with some predicting it will take three years minimum to complete.

“I’m seeing way more lawsuits on indexed life than I do on indexed annuities,” Moore said. “But I do think there will be more lawsuits related to indexed annuity illustrations. I just think we haven’t had a market environment where people are getting enough zeros that they’re saying, ‘Hey, this isn’t what I signed up for. Let me talk to an attorney.’”

Everybody gets an index

Equity indexed annuities first appeared in 1995 as an innovative product design that gave consumers a path to earn interest based on the performance of a stock market index, most commonly the S&P 500, without any downside risk.

By 2006, the industry realized the word “equity” was too confusing. Products were renamed “fixed indexed annuities” to help avoid any perception of a direct investment in the stock market.

Awareness of all fixed products grew following the Great Recession of 2008-09. Millions of near retirees were crippled financially when retirement accounts lost a huge chunk in the market collapse. “Flight to safety” entered the retirement planning lexicon as new indexed products offered the opportunity to participate in market gains without ever losing valuable retirement dollars.

Then came the proprietary indexes. Moore counts roughly 160 different indexes now, many with grandiose names such as the JP Morgan Mozaic II index.

One issue is the lack of history with many of these proprietary indexes. A traditional index like the S&P 500 has decades of history to provide consumers with thorough illustrations based on historical performance. Newer indexes don’t have that.

“It’s been a bull run over the last 10 to 20 years,” Politzer said. “As a result, any reliance on that period of data is going to show a somewhat optimistic forecast of the contract. It’s just the nature of how the math is completed. We’ve actually added an extra disclosure to our illustration as a result.”

Politzer conceded that some illustrations showed unreasonably high results and said Athene pulled “a couple because we weren’t comfortable putting them in front of customers.”

Then there are the “hybrid” indexes, a combination of multiple indexed asset classes or securities, often with a volatility-
overlay mechanism to stabilize returns.

Illustrations might not be as big of a factor as in the past, Moore said, because many agents are “flocking to the tried-and-true” indexes such as the S&P 500.

“The conversations I’m having with agents … I’m getting feedback where they’re saying ‘I don’t trust hybrid indexes,’ or ‘My clients did not fare very well with their indexed hybrid allocation last year, and so I’m burned out on them,’” she said.

Volatility still present

The overall economy remains far from a comfortable, confident position, analysts from Nasdaq said during a recent webinar on economic trends and index innovation hosted by the National Association for Fixed Annuities.

While the Fed can exert influence through multiple rate cuts this year, there remains concern about the labor market balance and potential recession risks, said Normyle, joined by Mark Marex, senior director in index research and development for Nasdaq.

The COVID-19 pandemic highlighted the need for downside protection and diversification in a portfolio, Normyle said. Insurers can provide that through indexed products.

“The biggest thing that we continue to see and hear from clients is that investors want more choice,” Normyle said. “They don’t want to only be presented a menu of S&P 500 [volatility] control products that are fixed annuities. They want to be able to do RILAs. They want to be able to do something more exciting in the equity sleeve.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.