Treading Carefully In An Uncapped FIA World
March 24, 2015 by Cyril Tuohy, cyril.tuohy@innfeedback.com
Surely, annuity sales channels have heard of uncapped fixed index annuities (FIAs). It is a phrase filled with upside promise.
At Nationwide, the company’s New Heights FIA promises to position investors for growth.
Symetra Financial touts its Edge Plus and Edge Premier FIAs pegged to the JP Morgan ETF Efficiente 5 Index. Because this particular index is designed to dampen volatility relative to other indexes, “a cap is not imposed,” the company said in a press release.
The index, however, “is subject to margin,” which is subtracted from the performance of the index to calculate the interest to be credited, Symetra said.
And Security Benefit’s Total Value Annuity was the first FIA with an uncapped index crediting option, according to the website of Impact Partnership, a life and annuity marketing company based in Kennesaw, Ga.
Uncapped index annuities remove the ceiling placed on traditional index annuities to prevent investors from taking full advantage of an index’s “upside” or gains.
A cap is considered a “hard limit.” Hard limits are removed through participation rates and spreads, which are considered “soft limits.”
Annuity product specialists explain capped and uncapping this way: A 5 percent cap applied to a 10 percent index return would credit 5 percent interest. If the index returns 20 percent, the credited interest remains 5 percent.
A 50 percent participation rate applied to a 10 percent index return would credit 5 percent interest, but if the index returns 20 percent the credited interest would be 10 percent.
A 5 percent spread applied to a 10 percent index return would credit 5 percent interest. If the index returns 20 percent, the credited interest would be 15 percent (assuming a 100 percent participation rate).
For many agents, an uncapped strategy offers a way for an insurance product to promise a little more performance at a time when many investors are tempted to place their savings in market-tracking mutual funds or equities to ride the robust market returns of the past three years.
But according to Jonathan C. Illig, executive sales consultant with Brokers Alliance in Fountain Hills, Ariz., advisors need to be careful about following an uncapped strategy in an FIA.
He said uncapped strategies appear as “we approach the mid to the top end of bull markets,” where some agents proclaim the index annuity will perform like the market.
“Of course, that’s not going to happen,” Illig told InsuranceNewsNet. “You cannot limit downside risk without limiting upside potential, just cannot be done.”
Annuities are designed to protect against the ups and downs of the market, not to mimic them. It’s also important to note that an “uncapped” FIA strategy isn’t the same as an “unlimited,” or capless, FIA strategy, Illig said.
The bull market celebrated its sixth anniversary earlier this month.
Meanwhile, agents are rushing to the cash in on the FIA craze, which saw FIA sales set another record for the sixth consecutive year.
Data released by Wink’s Sales & Market Report said fourth-quarter sales of FIAs hit $11.9 billion, an increase of 3.5 percent compared with the year-ago period, as “nontraditional” distribution channels such as banks sold more FIAs.
“As long as interest rates remain low, these new, nontraditional distributions will continue to force indexed annuity sales upward,” Sheryl J. Moore, president and CEO of Wink Inc. and Moore Market Intelligence, said in a news release.
LIMRA Secure Retirement Institute (LIMRA SRI) reported fourth-quarter FIA sales at $12.2 billion, an increase of 3 percent from the year-ago quarter.
Sales of FIAs reached $48.2 billion in 2014, an increase of 23 percent compared with 2013, LIMRA SRI also reported.
The 23 percent increase was the highest percentage year-over-year increase of any of the fixed annuity categories tracked by LIMRA SRI. Sales of fixed annuities increased 13 percent to $95.7 billion last year over 2013.
Past abuses haunt the FIA industry, but tighter regulation of FIAs has helped “save the industry from itself,” Moore said, even if the concern for the moment remains the uncapped index interest features of FIAs.
Illig said it’s important for agents and advisors to approach the FIA market with a level hand, even in the midst of double-digit sales increases.
“We need agents to be saying ‘Look this is a useful tool but you have to make sure we have the right amount in the annuity for the right reason,’” said Illig, who works with distributors and trains annuity sales teams.
Wink’s Note: Marketing crediting strategies as “uncapped” can lead to consumers’ perceived notions that their indexed annuity has unlimited growth potential. No indexed annuity offers unlimited potential, as the minimum guaranteed floor of 0% necessitates a limit on the upside potential.
