Just as living benefits helped drive broker-dealers' variable annuity feeding frenzy years ago, these guaranteed features appear to be propelling firms' sales of indexed annuities.
Broker-dealers and wirehouses have taken a
particular shine to indexed annuities, seeing them as a fixed-income alternative that can provide better growth than a CD. They're an attractive product, considering that low interest rates have made many other fixed-income alternatives less promising.
A quick lesson on these products: Indexed annuities credit clients' accounts with a minimum guaranteed rate of interest. They also credit an interest rate that's tied to movement within an index. Accountholders don't capture the full amount of the index's performance, as carriers place limits on clients' participation in the index and can cap the return.
Total first-quarter sales of indexed annuities hit $10.9 billion, according to data from Wink's Sales and Market Report, up by about 39% compared to the year-earlier period.
Data from LIMRA Secure Retirement Institute indicate that buyers chose guaranteed lifetime withdrawal benefit riders when available in 68% of the indexed annuities purchased in the first three months of the year. It should be noted that Wink's sales data differs in this department, due to different data collection methodologies between the two research groups. Wink notes that election rates for GLWBs were 59.2% — when available for purchase — in the first quarter.
What's interesting, however, is where those GLWB sales are coming from.
Indexed annuities sold in the broker-dealer channel have a 70% election rate for GLWBs, second only to independent insurance agents (74% of indexed-annuity contracts sold there have a GLWB election), according to Limra.
The bank channel, on the other hand, only had an election rate of 30%, Limra found.
The reason for the sharp difference in the GLWB election rates across different channels goes back to the context in which the adviser is recommending the indexed annuity, according to Mark Paracer, senior research analyst at LIMRA.
Broker-dealers command a small but growing share of the indexed-annuity market, Wink found. They were responsible for 4.3% of all indexed-annuity sales in the first quarter of 2014, up from 1.3% in the first quarter of 2013.
The lion's share of indexed-annuity sales come from insurance agencies, which accounted for 80.7% of sales in the first quarter, down from 87.8% in the year-earlier quarter, according to Wink.
“The [broker-dealer] channel is growing,” Mr. Paracer said. “They're definitely experienced with variable annuities and [guaranteed lifetime withdrawal benefits].”
“In that channel,” Mr. Paracer added, “there are people who didn't look at indexed annuities before, but can now look at them as an income story.”
As annuity gatekeepers at broker-dealers familiarize advisers with indexed annuities, two main motivations for the sales have emerged: either the client wants some accumulation with principal protection or the client is seeking income for life.
At Securities America Inc., for instance, income has been the primary driver for indexed annuity sales.
“Advisers want the highest amount of income for the lowest amount of premium,” said Zachary Parker, first vice president of income distribution and product strategy at the firm.
“The vast majority of indexed annuity sales we're seeing are focused on the income side of things,” said Judson Forner, director of investment marketing at ValMark Securities Inc. “Income starts the conversation, and principal protection is absolutely the second part of the story.”
Depending on the client's age, the rep might draw a comparison between a variable annuity with a GLWB,
which are coming back, versus an indexed annuity with a GLWB. In that case, the VA might be a more compelling choice for a client in his 50s, particularly if there is a roll-up feature on the annuity, according to Mr. Parker.
Meanwhile, a client in his 60s with a seven-year horizon before taking income might be more inclined toward the indexed annuity, as it offers more guaranteed income for the premium, he explained.
While income is driving the sales of indexed annuities for broker-dealers, that appears to be less of the case for the bank channel. Again, in that channel, only 30% of contracts were sold with a GLWB election during the first quarter, according to LIMRA.
Similarly, banks account for a small but growing amount of distribution, according to Wink. Banks made up 13.5% of sales in the first quarter of 2014, up from 7.6% in the first quarter of 2013.
But here, the indexed annuity is likely competing against a staple product on the bank agent's shelf — the certificate of deposit.
“In the bank environment, where CD rates are at a historic low, the indexed annuity can be positioned as an attractive alternative to the CD,” said Mr. Paracer. “You have protection of principal and a better prospect for growth.”
