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The Multibillion-Dollar Pie

How big is your slice? It may be time to rethink annuities and how you can successfully incorporate them into your practice.

By Lynn Vincent

What are you selling these days? Life? Health? Disability? If you’re like 60 percent of insurance advisors, what you’re probably not selling—or selling much of—is annuities.

By mid-2004, career and independent insurance agents had sold just 44 percent of U.S. individual annuities, according to LIMRA International—only about two-fifths of a $112 billion pie. Together, career and independent agents accounted for just under $44 billion in annuity sales. Meanwhile, banks sold $24 billion, more than any other single distribution system, while direct response sales, stockbrokers, financial planners and independent broker-dealers made up the rest.

And insurance advisors aren’t gaining much ground in annuity sales, either. Career agents sold just 3 percent more annuities in 2003 than in the first half of 2004, LIMRA reports. Independent agents made no gains at all.

What does that mean? It means, says Southern Farm Bureau agent Kelly Dickson, that somebody else may be selling your client annuities. Advisor Today spoke with six annuities producers and brokers to find out why—and to learn how advisors can build their practices by increasing annuity sales.

Why the low sales?
“If you’ve got access to annuities and a good product, why shouldn’t you be the one selling them?” asks Dickson, a Central Texas AIFA member who is based in College Station, Texas. “As a multiline agent, I don’t want to give someone else an ‘in.’ I don’t want some other agent’s name to pop into my client’s mind.”

Dickson understands the reluctance of some advisors to get involved selling annuities. Many are unfamiliar with the products, and afraid they’re going to have to answer questions they may not know the answers to. Other advisors are skeptical about whether clients will want to talk to their insurance agent about an investment product.

“Most agents aren’t trained in this area,” says Jim Meaders, president of National Insurance Brokerage and a member of NAIFA-Atlanta. “They don’t include annuities in their prospecting. They look at the product as an add-on, a surplus, and may write one or two a year.”

That kind of thinking causes advisors to “walk away and leave tremendous revenue on the table,” Meaders says. “Consumers hear about annuities from their stockbroker, financial planner or banker. But they just don’t hear about them often from their life insurance advisor.”

That’s an ironic twist since life insurance companies issue annuities. Still, it’s not surprising, since life carriers center their financial success models, and thus their agents’ training, around their most profitable product—life insurance. That means advisors who want a larger slice of the annuities pie may have to seek training on their own.

A growing market
Why might they want to? Investor mindset alone, Meaders points out, ought to indicate that annuities are a market ripe for expansion. For one thing, though some investors are inching back into equities, there remains an abiding interest in safety of principal, even among those not quite ready for retirement.

Take Lenny Martin’s clients, for example, who may typify the quintessential annuities prospect: at or near retirement, wanting a better return on investments without risking principal, aiming to reduce or eliminate taxes and yearning to pass on an inheritance without the government getting a nickel.

“Annuities take care of all of those concerns for my clients,” says Martin, principal of Leonard Martin & Associates in Warwick, R.I. Martin especially likes equity-indexed annuities, which offer clients the upside of equities markets while eliminating downside risk.

By mid-2004, the sale of EIAs had increased 41 percent to $8.9 billion. But Martin, a Rhode Island AIFA member, notes that many advisors still shy away from them because they feel the products are too complex to present to prospects.

An easy presentation
Martin has his EIA presentation whittled down to the basics. He tells his clients, “Look. You’re going to give up a little bit of the high side to minimize the downside risk.” Then he shows them how their nest egg would do in the S&P at a 10 percent rate of return. “I give them year-by-year examples, and show them how the money they earned the previous year can be locked in on the contract anniversary. ‘You can’t lose that,’ I tell them.”

Then Martin asks his clients another question: “How much are you willing to lose?”

The answer, of course, is almost always “none.”

Next Martin asks them: “Do you want a potential return of more than 2 or 3 percent on your money?”

That answer, of course, is always “yes.”

Then he points out that EIAs guarantee principal and offer high return potential, and asks, “How does that sound?”

“Great,” his clients reply.

Martin then asks his clients, who usually have their assets in some type of taxable equity accounts, “How do you like paying taxes on money you’re not using?”

They hate it, of course. Then he shows them how rolling their assets into tax-deferred annuities not only lowers their annual tax bill; it also lowers their tax bracket because they are not receiving interest that adds to their annual bottom line.

That’s Martin’s annuities explanation in a nutshell: You keep all your money, make more on top of that, and keep Uncle Sam’s mitts out of your wallet. “It’s a nice flow,” Martin says. “Easy to present.”

Sometimes, though, clients object, particularly those who were piling up double-digit gains in the ‘90s. “Why,” they ask, “should I give up the high side of the market? If the market goes up 20 percent, why should I get only 17 percent?”

At that point Martin explains the opposite side of that particular coin: What if the market goes down 20 percent? Do you have time to earn that back? “I tell them that sometimes zero gain is better than potential gain,” Martin says.

Selling the zero
Gary Adkins calls that “selling the zero.” Adkins, principal at the Annuities Store in Sacramento, Calif., tells the story of “Bill,” a producer for a very large company out of Boston. About two years ago, as people were losing lots of money in equities, Bill became very interested in EIAs and began to move lots of his clients into them, explaining the zero-risk-to-principal benefit, while also touting the potential of double-digit returns.

Adkins remembers a call he got from Bill one morning. “I sold my client an EIA and told her about the potential double-digit returns,” Bill says. “She got her statement this month and the returns were a big zero. How do I talk to her about that?”

Adkins suggested that he and Bill do a little research and find out how the client would have fared had she left her money in equities. They did, and discovered that the client would’ve lost $160,000! After Bill showed her the numbers, she was very happy with a “big zero” on her statement.

“Don’t be afraid to sell the zero,” says Adkins. Zero return is nothing to be ashamed of, especially when the flip side is a huge loss.

Before the market tanked in 2000, Meader’s company used to try to prevent the zero, recommending that equity investors roll market profits into index annuities, and thereby lock in gains. “It was a great idea, but no one ever did it,” he says now.

“Today, it’s a completely different story. People are getting out of the market to eliminate risk and lock in gains. There’s probably no better prospect for index or fixed annuities than someone who has had significant losses in the market.”Still, within the safety of annuities in general, consumers—perhaps encouraged by the gradual, overall economic recovery—seem to be dipping toes back in the waters of risk. Premiums deposited in variable annuity separate accounts leapt 45 percent by mid-2004, while premiums deposited directly into VA fixed accounts fell 36 percent.

The move toward risk exposure points to what may be reluctance among clients and advisors to abandon a decades-old focus on accumulating retirement assets as opposed to planning how to make those assets last.

Making money last
“There has been very little emphasis on the distribution of retirement income,” says Russ Smith, a principal with Torimax Financial Group in Canyon Lake, Calif., and a NAIFA-Inland Empire member. “But that emphasis is changing. The industry is slowly but surely moving from accumulation to conservation—making sure, first, that our retiring clients have enough money to live on, and second, that they don’t run out.”

Why hasn’t retirement income distribution been a hot topic before? First, according to a winter 2003 analysis published in Benefits Quarterly, the number of people heading into retirement with large 401(k) balances is just beginning to swell. Second, until the last decade, there weren’t a lot of choices for retirees to make with regard to income distribution: Most defined-benefit plans were paid in the form of annuities, as were, until the 1990s, most defined-contribution plans. And while financial planners have long dealt with management of withdrawals from asset portfolios during retirement, they have rarely used annuities as a management mechanism.

Now, though, from the rubble of the defined-benefit era has risen the age of self-funded retirement, an age that might have begun golden if not for the ugly bear market that ravaged the retirement accounts of that first batch of workers whose accumulation “time horizon” ended just as their 401(k)s shriveled beyond repair.

That’s left wave after wave of near-retirees casting about for new options. And, with tax-deferral, accumulation, security and income-control benefits of the new generation of annuities, insurance advisors are perfectly positioned to tap into the new concern over retirement income management.

“Annuities, last time I checked, are the only product guaranteed to provide lifetime income, even in a low interest-rate environment,” Smith says. But, he notes that many advisors, still suffering hangovers from the era of frenzied accumulation, consider for their clients only annuities with high market upside potential.

“Fixed annuities are underutilized because of the emphasis on accumulation,” Smith says. Advisors often flit past the benefits of safety and future cash flow and focus on yield, shooting for 6, 7, 8 percent. Meanwhile, the average fixed annuity is right now yielding only 3 to 5 percent.

“Not very sexy,” Smith says.


THE PROSPECT: Retirement age, looking for better returns without risking principal and a way to reduce taxes and pass on an inheritance without interference from Uncle Sam.

TO SELL: Help clients change their focus from asset accumulation to conservation, and educate clients about the basics such as how annuities are guaranteed and the new liquidity features.

Fixed annuities look a lot sexier, though, when clients take a realistic look at market trends and mortality tables. “I try to demonstrate to them that the market doesn’t always go up, and they might live a long time. Therefore they need to have some very, very safe money,” he adds.

Advisors can overcome clients’ resistance to annuities by explaining how annuities are guaranteed and why insurance companies are able to pay higher rates than banks on zero-risk money: Because of asset- and risk-pooling, a portion of annuity assets contributed by those who die early can be used to finance higher payments to those who don’t.

Educating the client
That sort of unpleasant-but-simple truth is an important part of client education. Research compiled by Benefits Quarterly shows that consumers don’t understand the concept of risk-pooling. Other educational hurdles include:

Liquidity: Clients are often concerned that they won’t be able to get at the money locked up in an annuity contract. But advisors can ease that fear by selecting products with newer liquidity features and providing clear, simple explanations of how such features work.

Preexisting annuitized payments: Two-thirds of the wealth of households currently approaching retirement consist of preexisting annuitized payments such as Social Security. Advisors should educate clients about how annuities can augment such income streams, improving quality of life without increasing risk.

But the annuities education process can sometimes cross the line from informative to excruciating. Pat Allen, president of Allen Marketing & Associates and Allen Financial Group in Uniontown, Ohio, and Akron AIFA member, finds that a large number of his clients don’t care about the inner intricacies of annuities products.

That’s what happened with Joe and Angie Kline, a couple referred to Allen by a neighbor. Angie is a nurse and Joe works in a truck-loading dock. Both are 54, and had accumulated about $300,000 investing in mutual funds during the go-go ’90s. But when the market turned sharply south during the spring of Bill Clinton’s last year in office, the Klines’ fund balances began to shrink. The market eventually recovered, but by then they’d lost about 40 percent of their nest egg.

When the couple met with Allen, he updated their life insurance, and hooked them up with an estate planning attorney and a securities guy. But Allen specifically remembers the meeting at which he began to explain the benefits of rolling most of the Klines’ assets into index annuities. The table between them was covered in paperwork and the meeting hadn’t gone on that long. But apparently it was long enough for Joe, who looked at Allen and said, “Pat, I’ve got a question for you.

Can you just tell us what to do?”

“Yes,” Allen replied.

“I’ve got another question for you,” Joe said, nodding toward the paper jungle on the table. “Can you just take care of all this stuff?”

Except he didn’t say “stuff.”

The advisor’s job, Allen explains, is to “oversimplify things for clients in an overcomplicated world. A lot of times we try to impress people with what we know. But most people are too busy for that.” That doesn’t mean, Allen says, that clients don’t want any input at all. Jim Meaders agrees: “As advisors, we’re frequently asked what we recommend, but make sure to give clients a chance to participate in the process.”

First, ask annuity prospects what their goals are for the particular sum in question: What do they want this money to do? Be available for retirement? Function as a rainy day fund? Create an estate? “The client may not have thought about the money in those terms,” Meaders says.

Another question: With index or variable products, what is an acceptable rate of return? If the client thinks 12 percent is reasonable but index annuities are returning 6 or 7 percent, it is best to look elsewhere for a place to put his money.

Indeed, Allen notes a decline over the past year in guaranteed returns, and in agent commissions paid on annuity sales. Several carriers offering guaranteed minimum income benefits of 4 to 6 percent have recently reduced them to 2 to 2.5 percent, sparking an exodus from those firms among advisors in search of greener pastures.

What those advisors found, though, were other companies cutting their GMIBs and commissions, too. It’s all part of the cycle. As interest rates rise, so will annuity guarantees and commissions. And, from the client standpoint, Allen says, the reduced guarantees are a “non-event” if the agent presents the products correctly.

Lynn Vincent is a frequent contributor to Advisor Today.


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