More investors turning to indexed annuities

Gains in indexed annuities are making some financial planners take notice, with first-quarter sales jumping 14 percent compared to last year. Overall, annuity sales are currently slumping, but indexed annuities are turning into a hot commodity.
According to The Insured Retirement Institute, U.S. annuity sales in the first quarter of 2012 dropped 2.5 percent from the previous quarter and variable-annuity sales were down 2.7 percent from the fourth quarter; but variable-annuities’ net assets reached an all-time high of $1.61 trillion during the first quarter, a 7.2 percent increase from the previous quarter’s $1.5 trillion.
That’s because older customers are discovering that annuities can provide the safety and guarantee of principal and credited interest more than a certificate of deposit (CD) can. With indexed-annuity plans, customers receive a minimum guarantee in addition to participating in some of the index gains, but with none of the losses.
The principal is ensured. Unlike most securities where your account balance can fluctuate due to market performance, premiums deposited into a fixed index annuity are guaranteed to never go down due to market dips. The returns might be higher than traditional products such as CDs, money-market accounts and bonds but not as high as market returns.
“We are seeing that industry trend. Fixed rates are low and sales are down,” said John D. Olerio, a senior vice president at Webster Investment Services, part of Webster Bank. “We are seeing a lift in indexed annuities but it is still not a major product line, at least not for us. It is something that we are seeing more interest in and it’s something that people are at least considering as an alternative [to traditional retirement plans], depending on the amount of risk they are willing to take. It’s an increasing portion of the annuities pie.”
In an environment of low rates and an unstable Dow Jones Industrial Average, clients are looking for safety guarantees while still maximizing profit. “There are many different [annuities], many different variations, but typically the time to maturity is from five to 15 years,” said Leonard Hayduchok president of Dedicated Senior Advisors LLC of Princeton, N.J. “Ultimately, a person who is attracted to an annuity is someone who wants a little bit of a lower risk; typically that’s someone who is a little older.” Another benefit is that the withdrawal time frame can be aligned with the person’s income needs.
According to Hayduchok the 2000s was “the lost decade,” where the market had plenty of variation but a net result of zero change.
Independent agents were responsible for 89.6 percent of indexed-annuity sales during the first quarter, according to AnnuitySpecs.com. There is recognition that people are living longer and there is a need for income-generating products which can produce income that a person cannot outlive.
Annuities are safe and can give decent returns, but they aren’t as liquid as other vehicles. They can, however, allow partial withdrawals; generally 10 percent can be taken without a penalty.
In addition to the traditional fixed annuity and the variable annuity, another type of annuity that is growing in popularity is the equity-indexed annuity, said Donna M. DiBiasio of Donna M. DiBiasio Insurance in Warwick.
The equity-indexed annuity credits interest based on a formula that considers the change in the value of an external equity index (S&P 500 or Russell 2000), but does not participate directly in any stock or equity investments. Variable annuities offer choices from a diverse portfolio of sub-accounts offered through money-management firms. However, the values of the sub-accounts can vary, up or down, and involve investment risks. Fixed annuities are interest-based vehicles similar to bank-issued CDs. They do not offer options to increase in policy value above the declared interest rate.
DiBiasio noted that an annuity contract has two purposes – to accumulate money, and to provide a distribution of the money in a lump sum or in a series of payments for a designated period, or lifetime. Annuity contracts have guarantees regarding premiums paid, interest credited, death benefit and income amounts which distinguish them from other savings vehicles. Contributions to an annuity are federal and state income tax-deferred until withdrawn or received as income. According to DiBiasio, it is important to understand that annuities are designed to be long-term investments. Substantial taxes and insurance company charges may apply if the funds are withdrawn early.
But make no mistake, safety is the key. The Dow Jones industrial average hit a four-year peak of 13,339 on May 1; by June 13 it had dropped 8 percent, to 12,411 points. “That’s about a year of average growth, and we haven’t even had that in about 14 years,” Hayduchok said.
Total sales of annuity programs dropped 8 percent from the first quarter 2011, to reach $54.8 billion. After holding the line for two years, variable annuities dropped 7 percent from last year, to $36.8 billion. Total fixed annuities dropped 10 percent in the first quarter to $18 billion.
But indexed annuities reached $8.1 billion, marking the third straight quarter they outperformed counterparts, capturing 45 percent of the market, according to LIMRA International, the former Life Insurance and Market Research Association of Windsor, Conn.
Indexed-annuity sales are benefiting from the guaranteed lifetime-withdrawal benefit riders being offered. In the first quarter of 2012, two out of three indexed-annuity buyers elected these riders, which offered the ability to receive guaranteed lifetime income without requiring the owner to annuitize the contract.
And that same pattern has been found elsewhere. According to the Beacon Research Fixed Annuity Premium Study, the first-quarter’s income-annuity sales climbed almost 23 percent from a year ago; an income annuity was the quarter’s bestselling product for the first time; and indexed annuities advanced about 9 percent. •

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