Insurance Q&A

April 19, 2013

An annuity with boomers in mind

Filed under: Annuities,Indexed products — rrroark @ 2:30 pm

For much of the past decade, variable annuities were “destination” products for clients’ retirement-oriented dollars, and with good reason. Variable annuities gave the vast baby boomer generation, then pre-retirees, market-linked accumulation potential, provided generous lifetime riders that limited downside risk through guaranteed benefits, and maintained liquidity.

The variable annuity benefit capability, however, is altered today as a result of volatile equity-market conditions combined with the historically low interest rate environment. In the face of skyrocketing costs for hedging, various firms have exited the variable annuity business altogether. Remaining competitors generally have scaled back (and/or increased the price of) the lifetime guarantees offered in their variable products.

For more coverage from our 2013 boomer survey, visit

With more modest and expensive lifetime income guarantees, many variable annuities have moved closer to their originally intended purpose of providing powerful tools for accumulating retirement assets. Importantly for advisors and clients, this repositioning of variable annuities has paved the way for a more rational, financially responsible spectrum of annuities in which the roles played by different products are more clearly delineated and more easily matched to the client’s stage of life.

The contemporary annuity continuum

Variable annuities — which pair income guarantees, liquidity and potential for asset growth with the possibility of market-induced downside risk protection — anchor the more aggressive end of the guaranteed retirement income spectrum. At the opposite end are deferred income annuities (DIAs) and single-premium immediate annuities (SPIAs), characterized by strong income guarantees and stable account values but little or no liquidity and no market-related growth potential. The former clearly have a place for clients still in the retirement-accumulation phase of life, and the latter should appeal to the more risk-averse clients and those squarely in the decumulation phase who seek income they cannot outlive.

Neither, however, may be desirable to many boomer clients, given their stage of life and the present macro environment. With portfolios battered by, and barely recovering from, two stock market crashes in less than a decade, boomers in or approaching the early years of retirement continue to need income growth potential yet cannot afford to sacrifice principal protection for growth. This need for growth, combined with the relative illiquidity of income annuities, may make DIAs and SPIAs a difficult sell to boomers. Variable annuities, however, may be too volatile for these clients and provide too little guaranteed income.

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June 1, 2012

Indexed Products: For the Best and Worst of Times | LifeHealthPro

Filed under: Indexed products — rrroark @ 12:26 pm

When you think about all the different obstacles consumers must face today on their way to a fruitful retirement, it boggles the mind. First, there are the endless choices with regard to financial products, from mutual funds to annuities (both fixed and variable), to individual securities like stocks and bonds, to bank products. The list goes on and on. And then there’s life insurance, from term and universal life, to indexed universal life and variable life, to whole life.

Fortunately, indexed products today are perhaps among the simplest solutions to help consumers cut through the endless clutter of product choices and ensure they minimize or eliminate uncertainty in their financial futures. Simply put, having indexed products as a core holding of an insurance and retirement portfolio can help ensure clients don’t find themselves in the wrong product at the wrong time. In addition, owning an indexed product as a core holding will help reduce the temptation consumers often have to do the wrong thing at the wrong time, even if for the right reasons.

Consumers: Their own worst enemy

DALBAR, an independent, Boston-based financial research firm, recently released its latest edition of the Quantitative Analysis of Investor Behavior (QAIB). Using monthly fund data supplied by the Investment Company Institute, QAIB calculates a proxy for investor returns and compares this number to the returns produced by the broad market as defined by the S&P 500.1

For the 20-year period from 1992 to 2011, the S&P 500 returned 7.81%, on average, per year. It should be noted that this number is significantly lower than in past years, reflecting a downtrend in long-term average returns for equities resulting from two deep bear markets, 2000-2002 and 2008-2009. For example, the average annual return for the 20-year period ending in 1999 was a whopping 18.01%. For the period ending in 2007, it was 11.81%.

Clearly, the most recent 20-year return is disappointing compared to past 20-year periods. Worse still, the average equity investor continues to do far worse than the market itself, and this underperformance is entirely due to poor market timing decisions.2 Simply put, rather than stand by the old maxim of “buy and hold,” most equity fund participants have darted in and out of their funds at the worst times. Fear and greed are the enemies of investing success, and they continue to prevail. Fear drives investors to sell when the markets are in a tailspin, and greed compels them to buy after market gains have already been booked.

Take, for example, that 20-year period ending in 1999, in which the market returned 18.01% per year on average. In stark contrast, the average equity fund investor earned far less, only 7.23% per year, during this time frame. Putting this into perspective, the average annual investor return during the best 20-year period of market performance still underperformed the average market return during the market’s worst 20-year performance, which happened to end in 2011.2

The reason for this poor outcome is simple — as Michael Jackson once said, “It’s the man in the mirror.” Individuals are their own biggest obstacle when it comes to successfully accumulating wealth over the long term, due to the powerful pull of fear and greed. People, more often than not, succumb to loss aversion, in which the pain from their losses is greater than the pleasure from their gains. As a result, they are quick to flee the discomfort caused by excessive market volatility, and, subsequently, they miss out on the big gains that always come without warning.

In contrast, they usually only want to get back into the markets once they’ve heard about the big gains that have already taken place. I mention “usually” because, this time, after a horrific decade of volatility and seemingly endless bad economic news, the markets seem to have quietly recovered, and yet, no one seems to notice or care. I suspect this is because they all think this may be yet another “head fake” designed to lure them in only to collapse and spit them back out, poorer for it once again.

As I write this, on March 18, the Dow Jones Industrial Average just crossed 13,000, the NASDAQ broke the 3,000 barrier for the first time since December 2000, and the S&P 500 Index crossed the 1,400 level for the first time since May 2008.

All of this happened during the week of March 12, exactly three and a half years since the financial crisis officially kicked off in September 2008.

Only three short years ago, in March 2009, these indices were hovering at roughly half of these current levels, as the global economy appeared on the verge of total collapse. Given the well-documented behavior of individuals reacting to financial volatility, it is fair to assume that not many went for broke in March 2009 to see their portfolios double in value by March 2012. Instead, like the rest of the world it seems, the bunker mentality was and is in full effect, leaving the equity markets to rise with little fanfare and the fixed income markets to continue rising while relentlessly pushing down yields.


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