Date: Tuesday, May 15, 2012
Time: 10:00 AM – 10:30 AM PDT
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May Newsletter and Grids – Here is the link to our most recent newsletter. Your comments and suggestions regarding the content is encouraged and appreciated.

May 2012 Newsletter and Grids

Really?
How does this “expert” explain the fact that over the past 10 years, the S&P 500 has returned an average rate of return of 1.55%, while during the same period of time, the average fixed, guaranteed annuity has yielded in excess of 3.50%, over twice the return WITHOUT ANY OF THE RISK!

Really?
If this “expert” charged the industry average of 1.75% advisory fees, how well did his clients do during the past 10 years? Hopefully better than the average of the S&P500, but did the account grow every day without any downturns?

Really?
Yes, fixed annuity contracts have costs, which include profit, acquisition costs and commissions, but the yields paid to the policyholders are net of those fees. Every year, with every statement, the “costly” fixed annuity showed a positive return. Can the “financial expert” make the same claim about every one of his quarterly statements?

When you conduct your portfolio reviews with your clients, I encourage you to point out the excellent track record illustrated in the Standard statements. This reflects well upon you as the advisor and reinforces your recommendations.

Oh yeah – one more thing I learned, Lanai has one of the finest golf courses I have ever played. The Challenge at Manele has ocean views from every hole, and although challenging, it was very friendly and playable for high handicappers like me. Great fun! Please share your favorites, not just golf but any activity/location that you find clears your mind.

I have made the observation that if the primary reason for purchasing any annuity GIB rider is to create a guaranteed income stream now or sometime in the future, then these riders can provide a definite benefit. It is also important to understand the associated costs involved. For this article, I want to focus only on the indexed annuity GIB riders. The cost of the riders from what I could find range from a low of 60 basis points to a high of 120 basis points.
According to LIMRA, indexed annuity sales for 2011 were $32.2 billion, and they expect the number to be the same for 2012. If indeed the percentage of GIB riders attached to indexed sales is over 50%, assuming an average rider cost of 85 basis points, that is $273,700,000 in fees paid for the benefit – which a great number of policyholders may never use.
Using software available from Annuity Rate Watch, I ran 10 year illustrations using the S&P 500 Annual Point to Point Cap for three of the most popular indexed annuity contracts. For simplicity, I am not providing detailed policy features, just what each of the products would have returned over the past ten years based on current caps with each product.

For those policyholders that actually turn on the income stream in year 11, the cost of the rider may not be of any concern, especially if the generated income meets the original goals. What needs to be considered are the costs involved if the policyholder does not use the income rider. In addition to the actual loss of value due to the rider costs, one must also consider two other points.
1. That we are at the lowest point in history for overall yields, caps and spreads, and that
    one is locking in those lower yields for the next ten years, and
2. If they don’t use the rider, and yields, caps and spreads increase in the coming years
    they have made the viability of a 1035 exchange or transfer a less attractive alternative.

It is important to understand that we believe that the GIB riders are very attractive features that can help a lot of retirees generate a stable and steady source of income. As I have argued in previous posts the primary purpose for allocating assets to these products and the riders should be pointed and specific, that a known, specific need should be the primary reason for making this decision. If indeed over half of index and up to 80% of variable contracts are being issued with the riders, I do not think that it is off-base to believe that a great number of annuity buyers are going to pay a substantial amount of money for a benefit they will not use. To compound the problem, if the market turns in the next couple of years and rates go back up to 2005-2006 levels, those who might decide to exchange or transfer their contracts will look at their statements a wonder whether or not they made a wise decision. Those in our business that recommend purchasing this benefit without identifying a specific income need sometime in the next 5-10 years, may find some very unhappy clients calling you or the insurance company. This can be especially a concern if the size of the deposit into a contract far exceeds the income benefit needs in the future. Target the need, the benefit and the costs.

For those who are using the interest income to provide or supplement their current income needs, their monthly income has been decimated. For those who have been saving for future income, they are rightfully concerned about the ability to meet their retirement income goals. Not that long ago, if a client was looking to create a guaranteed stream of income, immediate (income) annuities were on of the primary solutions offered. Not that many years ago, you could use the “Split Annuity” concept to meet a current income need and maintain the corpus of the principal.

The insurance industry is, if nothing else, very creative and responsive to changing economic times. Hence, the advent of Guaranteed Income/Withdrawal Riders, added initially to Variable Annuity contracts. I have read in our professional publications that somewhere between 80-90% of variable annuities sold during the past 12 months have been issued with guaranteed income benefit riders. Wow! The historical and primary benefit of “accumulation with tax deferral” has now been placed in a secondary position behind income.

The same trend has taken place in the fixed indexed annuity market. In my discussions with the carriers we represent, the same trend is occurring, those indexed annuity contracts with guaranteed income riders are out-selling contracts without the riders.

My question and the purpose of this blog relates to which of the options, variable and fixed indexed annuity offers the best value – if the primary reason for purchasing the contract is the ability to create a guaranteed income stream now or sometime in the future? If one is going to pay the cost of the rider it follows that the primary concern is the income stream versus accumulation.

At this point it is important to mention the guaranteed “enhancement or additional interest credits’ that are available on most contracts, indexed and variable. The typical rollup period is 10 years and the average guaranteed rate applied to the income base is 5%. For a $100,000 deposit, this will accrue to a guaranteed income base of $162,889. Again, using industry averages, the guaranteed rate on the income base is 5%. So, if the client waits the full ten years before turning on the income stream, the annual income will be $8144.45. It is not hard to understand how this would be attractive.

What is the price of this benefit? This is a tricky question. The reason goes back to the assumption that the primary reason for purchasing the rider is to create a guaranteed income stream. Using that assumption, we have to take into account the entire costs involved with the underlying contract. The average total fees and expenses for variable annuity contracts with the guaranteed income feature is 4.00%, according to industry sources. Most fixed indexed annuity contracts have an average annual fee of .85% for the income rider. I have purposely left out the accumulation side of the equation, and it is certainly true that any number of separate accounts in variable annuities can perform very well. That being said, assuming the average fee of 4.00% and a 5.00% guaranteed income stream, the underlying accounts would have to have an average yield of 9.00% to maintain the original premium deposit. Compare that to the 5.85% average yield on the indexed annuity to maintain the original deposit.

Does the math make one choice better than the other? Again, going back to the original intent for purchasing the income benefit, I would argue that the indexed annuity might be a better value. But there is another important question that needs to be addressed. How many of the myriad of annuity contracts issued with the income riders will be actually exercised in 10 years? It is very important that all parties understand the cost and compare that to the potential benefit.

Deferred annuities have gone through a major transformation. In the not to distant past, they were accumulation vehicles that might be converted to income sometime in the future. According to the numbers, this has been turned on it’s head. The reason is understandable. Many if not most Americans planning for retirement were counting on a yield of 3-5% on their “safe” retirement assets. In the course of my business, I have been queried on the differences and benefits or using indexed versus variable annuities and the guaranteed income riders. As always, you have to look at the client. If the primary reason that they are purchasing the rider is to provide a known, guaranteed source of income, then using an indexed annuity can be the best choice. There are fewer moving parts, much better underlying guarantees, the “cash” or accumulation bucket cannot lose money if the underlying strategy is negative, and the cost of the rider is cheaper.

I look forward to your thoughts and responses. I am certain this is a topic that will continue to be of interest and debate.

Mike Ferguson, CFP, CLU

• Concerned about the future purchasing power of their retirement dollars
• Fearful of locking into a low rate product
• Looking to take advantage of a potentially rising interest rate environment

Mark your calendar: September 29, 2011 at 10:00AM PST
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Making Lemonade out of Lemons

ING has introduced, and California has approved the Interest Rate Benchmark Strategy. In a nutshell, this annual point to point strategy is tied to the 3 Month LIBOR rate. If the 3 Month LIBOR rate increases during the term, this strategy will multiply any increase in the LIBOR rate by 4x’s (up to a current cap of 10%).

Stay tuned for more details, including webinars, emails, newsletter announcements, sales kits and individual phone calls.

Interest rates are at historic lows, which mean we may see a rise in interest rates in the future. The Interest Rate Benchmark Strategy provides the opportunity to take advantage of short term interest rate increases.

If you would like and early introduction about this unique product and how it can be of benefit for your clients and your practice, give me a call at 800-873-2693, or drop me an email: mikeferg@ipg-us.com.

The debate is over, the market has spoken loudly, and the opportunity to lock in the current rates will end quickly. In normal times, most companies will provide a week to 10-days notice of upcoming rate decreases, but given the current rates and volatility of the market, we might see rates dropping in hours and rate holds being narrowed.

There are many experts and pundits who believe that this low rate environment will continue for some time, one of the primary reasons being the weakness of the Euro and the European markets. Even given the U.S. debt and economic problems, we are still the best alternative for the safe money; hence there is increased demand for U.S. Treasuries, possibly driving yields even lower.

It is not too much of a stretch to envision 1.50% yields on annuity contracts in the near future. That makes the current yields very attractive. Although I haven’t any proof or current indication, it is within the realm of possibility that if rates remain low or decrease even more, that you might see insurance companies pulling annuity lines and products.

In the last month, the Dow has lost 10.5%. Once again, when you talk with your clients about their portfolios, you can point to their fixed, guaranteed annuity contracts. A fixed annuity is the only product that allows individuals to accumulate retirement savings, protect those savings from market losses and guarantee income for life.

The report address’s the challenge of deciding when to begin Social Security Benefits and how to use existing retirement assets to structure income that will cover income needs over a persons lifetime.

An excerpt from the report:

An immediate annuity can help to protect a retiree against the risk of underperforming investments, the risk of outliving one’s assets (longevity risk) and, when an inflation adjusted annuity is purchased, the risk of inflation diminishing one’s purchasing power.  Researchers have concluded that annuities have important benefits. For example, according to one association of actuaries, it is more efficient to pool the risk of outliving one’s assets than to self-insure by accumulating enough assets to provide enough income in case one lives to a very old age.  Annuities provide income at a rate that can help retirees avoid overspending their assets and provide a floor of guaranteed income to prevent unnecessarily spending too little for fear of outliving assets, according to one association.

The GAO report can be found at this website:  www.gao.gov/new.items/d11400.pdf

We are here to help you help your clients.  Need an immediate annuity quote?  Need a systematic withdrawal illustration?  Need a policy with a guaranteed income benefit?  Give me call, 800-873-2693, or email:  mikeferg@ipg-us.com.