Annuity Guys®, Dick and Eric examine the question on the mind of many people when comes to selecting an annuity in today’s depressed rate environment – should I jump in now or should I wait?
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Read the article that stimulated this weeks topic…
Why Indexed Annuities Keep Charging Ahead
In the first quarter, indexed annuities topped the charts in sales growth among all annuity lines as compared to first quarter 2011.
The sales volume still did not surpass that of more traditional annuity products, such as variable annuities# and fixed deferred annuities, but in terms of sales growth, the products were definitely the leader of the pack, and by a substantial margin.
What’s behind it? The answer is in the sales results themselves.
The sales results
First quarter indexed annuity sales reached $8.1 billion — up 14 percent compared to first quarter 2011, according to estimates from LIMRA. AnnuitySpecs.com is reporting similar results — first quarter sales of $8 billion in 2012, up by more than 13 percent from first quarter last year.
The differences in results reported by the two firms are not significant, given that the firms have slightly different lists of participating companies as well as different research parameters and definitions.
But the double-digit growth that both firms identified is significant, especially when viewed against the performance of other annuity product lines. For example, total variable annuity# sales fell by 7 percent in first quarter 2012 compared to first quarter last year, according to LIMRA. That was on first quarter 2012 sales of $36.8 billion.
In addition, total fixed annuity sales fell by 10 percent on first quarter sales of $18 billion, LIMRA says. That was despite the two-digit jump in sales of indexed annuities, which are included in the fixed total.
The total fixed annuity plunge was a result of sales declines in most fixed annuity categories that LIMRA tracks other than indexed annuities. These other categories include fixed rate deferred annuities (down 28 percent on sales of $7.1 billion compared to first quarter last year), book value annuities (down 32 percent on sales of $5.8 billion), and fixed deferred annuities (down 11 percent on sales of $15.2 billion). Fixed immediate annuities were the only products to flatline, coming in at 0 percent gain on sales of $1.8 billion.
AnnuitySpecs points out that first quarter indexed annuity sales did lag the previous quarter by 3 percent. But Sheryl J. Moore sees the product’s 13 percent increase over first quarter sales last year as the more compelling figure. Moore is president and CEO of Moore Market Intelligence, which owns AnnuitySpecs.com.
“No other lifetime income product is as strategically positioned to thrive in this low-interest rate environment. In fact, the indexed annuity is well-suited for any market environment,” Moore said in releasing her firm’s first quarter numbers.
LIMRA portrays indexed annuity sales as “the driving force in the fixed market” for the first quarter, and points out that for the third consecutive quarter, the products “outperformed traditional fixed annuities, capturing 45 percent of the fixed annuity market.” [Read More…]
Annuity Guys® Video Transcript:
Eric: We’re going to talk about annuity timing. Should you jump in or wait?
Dick: Well, that’s the big question. Do we jump in or do we wait and that’s a question we hear all the time.
Eric: We’re hearing it a lot.
Dick: Recently.
Eric: Especially even with people we’re working with in the last couple weeks, because things are changing. The market is changing, but why is the market changing?
Dick: Well, I think it has something to do with the government forcing these interest rates down.
Eric: Uncle Ben, are you doing it to us again?
Dick: These treasuries are setting new records on the downside, literally daily. So this is really making a difference and putting a lot of pressure on the annuity companies, and obviously banking instruments too, to lower rates dramatically.
Eric: Right. I mean we look at what has happened and I’m going to blame Europe, because they’re not here in the room with us, but the pressures of what’s happening with Greece and Spain and the euro and the flight to safety has been the flight to the United States. Bring us all your dollars, your euros, your yen. We’ll take them all and it’s pushing down the fed, the 10-year treasury is down 25%, from the beginning, just a couple of months ago.
Dick: So the big question gets down to do we jump in and do an annuity now for timing issues or do we wait for the rates to increase? Just recently, Bernanke has indicated that we’re likely to see this low rate environment, for three to five years. It wasn’t very long ago he was talking about the next year or two.
Eric: Yeah, it started it was going to be—when they started making these announcements telling us, giving us the information on how long they’re going to… it was 2013, then it became 2014, and then his latest statement is 2015. So now we’re in a—I don’t want to say **guaranteed low rate environment.
Dick: Yes, so how long do we wait for retirement? How long do we wait for these rates to change? Retirement isn’t always, say a choice. I mean there are a lot of reasons why we retire, and sometimes we just need to make that decision, because we need the income or we need the safety of the money. There are many reasons that we would move some money into an annuity.
Eric: Right and I think that’s the key. Why are you putting money into the annuity? If you need income and you don’t want to have to have that worry about outliving your money that’s where the strength of the annuity still lies. Now are we starting to see annuity companies start to pull benefits off the table?
Dick: Last week we had what three or four of them? Major companies start to pull back and just yesterday maybe, we were notified again?
Eric: I’ve seen two today of companies that have made announcements that within the next week to two weeks they are reducing their benefits.
Dick: And how many people have we met with over the past year or two that said that they were going to wait for things to go up?
Eric: Yes. I can remember two years ago when, oh my, gosh it was at 4.50% in the caps and they were like, “You know it’s going to go up to 5.0%. I’m going to wait till it’s a 5.0%.” Right now people would kill for 4.50%. So it’s trying to predict the market on that side, you just can’t do it, if you’ve got a crystal ball… What we’ve got though is we’ve got **guarantees of the fed. That’s probably not a **guarantee.
Dick: I was going to roll with you on the **guarantees. I was going a different way.
Eric: Prediction by the fed that basically, “Hey, we’re going to keep rates at a low level.” So timing-wise, do we wait? Well, if it’s income…
Dick: Then we should not wait, because the **guarantees that are offered right now on annuities for this income account, for the rollup to create a larger income in deferral is still excellent, and it’s about to take another step back.
Eric: It’s still better than what you’ll get in other areas sometimes, but the annuities excel right now with income. Guaranteeing a rollup and deferral, those are the pieces that really are superior. The lifetime income benefits versus some of the other pieces.
Dick: And if you need immediate income there is the possibility of using a hybrid, as some type of an inflation hedge or using an immediate annuity that has a **guaranteed cost of living adjustment. So there’s no reason not to consider going forward, if it’s that time to retire with immediate income or putting money aside for deferred income, because this is where the annuities really do shine.
Eric: Exactly. All right now so if I wanted to buy an annuity for growth, I’m trying to get the most bang for my buck in the sense of return, should I still buy an annuity now or should I consider other alternatives?
Dick: Yeah, we have a bridge to nowhere and we have an annuity in a package deal, right now. No, Eric. I say if you want growth we really have to think outside of the box. I think that we can still utilize safe money vehicles and use insurance companies for this, but I think that we need to be looking at more the secondary annuities, these would be like, pre-owned or pre-issued annuities, and you can find yields all over the internet.
Eric: Pre-owned, is that like buying a pre-owned car, a pre-owned annuity?
Dick: It’s certified. Actually, it is certified by the court. They’re court ordered. So they’re very, very safe. It’s backed by the insurance company, or the annuity company, the same as a standard annuity. Someone actually bought an annuity. Decided for whatever reason they did not need this annuity and they sold it on the secondary market.
And so by doing that, it can create a much higher yield. So we’ve been able to help different ones with yields in the neighborhood of between 5.0-6.0%. However right now, you see on the internet, you see advertised a lot, if you know where to look, somewhere in that 4.0-5.0% range. It just depends on the source that you have for these annuities. Another one would be that you could get growth. What would be another area?
Eric: Well, as you say, sticking with similar life insurance, in the sense of you’ve got life settlements, now. Life settlements are a little bit more unique in the sense of you’re buying life insurance that somebody decided that they didn’t need. Usually, it’s that someone purchased it and it was for a spouse and the spouse predeceased them. So they have a life policy they no longer need, so there’s more benefit to them by actually selling it on the secondary market, than cashing it out sometimes.
Dick: Right. So you know you’re going to get paid out on that and you know it’s **guaranteed by the insurance company that’s behind it, so it’s relatively safe, very safe actually.
Eric: You’re basically buying—you and usually a group of people are buying the premium. You’re paying the premium, in exchange for the death benefit, so you don’t necessarily always know when…
Dick: You never know when somebody is going to pass.
Eric: The people that underwrite these basically go in and they calculate, look at the life expectancy.
Dick: Of their life expectancy.
Eric: Usually they try to time it to 3-4-5 years, so you could expect it to happen, but you can’t **guarantee it. You’re putting this down, knowing you’re going to get this. You just don’t know how long it’s going to take.
Dick: So you always know that you’re going to have an increase in the money. You just don’t know what the percentage of the yield will be, based on the timing.
Eric: Right. You know you’re going to get the death benefit. You just don’t know when it is coming. You’ve also gotten another life insurance product. You’ve got your indexed life insurance. Now your caps there have not been impacted nearly to the extent that the annuities have. You’re still looking at caps that 12-14%.
Dick: Yes, and they’ve held up all through the whole financial crisis, so that’s again not for everyone, but it is an area where if you’ve got the right scenario, the right situation you get a pretty darn good growth on that. You do have to pass a medical audit.
Eric: Yeah, you have to be insurable or know somebody that’s insurable.
Dick: Know somebody who is insurable, right. So that’s thinking outside of the box.
Eric: There are alternatives out there, safe money alternatives.
Dick: If you want to earn somewhere in that 5.0% to maybe 7.0% range, and even in some cases it can go into the double digits, but we’re trying to be a little bit more conservative.
Eric: We’re by nature conservative.
Dick: Under, what do we call that, under promise?
Eric: Understate.
Dick: Over deliver.
Eric: That’s right.
Dick: Back to, did you have a point that you wanted to hit there, on something?
Eric: No. I was looking at the article that kind of stimulated the topic for today and talking about the changes, and what’s going on in the annuity market.
Dick: The annuity world out there.
Eric: You’re seeing a lot more of the purchases on the indexed annuity side, and I didn’t know if we were ready for the summary statement in this sense, but it’s basically looking at the changes and there are a lot more people purchasing indexed annuities.
Dick: Right, which are considered the hybrid annuity, so the fixed index annuity.
Eric: We like to personally think we’re responsible for the increases in the annuity market, but in all likelihood, probably not.
Dick: We’re rising a tide, across the nation with them.
Eric: And it’s because of one, the income riders. The ability for in retirement, and then you also have a safety of principal and a hope for gain.
Dick: Right. So you put all those factors together and compare the hybrid annuity or the indexed annuity to just a standard fixed annuity or the variable annuity#. What we’ve seen is a great increase in the overall rate of sale, of the indexed annuity and the hybrid annuity and a decrease in the fixed annuity, which is paying very low rates right now, and also in the variable annuity# which introduces the market risk factor.
Eric: People are agreeing with us more and more that they see the benefits of safety of principal and **guarantees, either whether it be, through just the **guarantee of not losing principal or increases in income.
Dick: Right. Well, I think we need to sum it up with—is this a good time to jump in?
Eric: Yes, and no.
Dick: He sounds like me, now.
Eric: If your timing is that you need income, if you want growth, there are vehicles out there that we would encourage you to look at.
Dick: If you want income it’s a definite, that a portion of your portfolio can go towards an annuity and the timing is probably better to move than to wait.
Eric: If you’re retiring now?
Dick: Or in the near future.
Eric: Yeah, as you say, you probably don’t have time to wait.
Dick: So that’s it for today, folks. Thank you for spending time with us.