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Indexed and variable products: tools for today and tomorrow: how have the roles of these flexible yet diverse markets changed?

You can give a mechanic and an accountant the same toolbox, but you'll get very different results if you let them work on your car It's not enough to have the right tools for the job; you have to know when and how to use them properly

As an agent, you may have had variable and indexed products in your toolbox for years, and you may have used them with success in the past. But many things are different today from a changing economy and more hesitant clients to the possibility of new governmental regulation and an evolving slate of products from insurance carriers. The methods that helped your business grow a few years ago might require a different strategy today.

So how can you leverage the benefits of your variable and indexed product line--some of your most effective tools--to grow your business in an uncertain and competitive environment? Here, industry experts analyze the current situation, assess where we're headed, and offer tips on staying ahead of the competition.


Indexed accounts can offer a wide variety of benefits that producers can highlight when presenting them to clients. But according to Glenn Stevick, assistant professor at The American College, agents should also be careful to present the products accurately and fairly.

"My concerns with these products are they're very complex," Stevick said, noting that participation rates and other variables can also change from contract to contract and carrier to carrier Also, derivatives could become more expensive to acquire in the future, making contracts more expensive to create. All this means that agents must thoroughly research each company and contract and explain them to clients if they're going to continue writing indexed business.

Still, the current economic uncertainty has given indexed offerings a chance to show their value, and Stevick believes their performance has helped validate the product.

"It looks to me that they've kind of stood the test of time" he said,. "Through this downturn they seem to have come out pretty well, which is kind of what was advertised."

According to Sheryl Moore, president and CEO of the indexed resources and, that downturn has created a new mindset for many clients, and agents can utilize indexed products to alleviate consumers' concerns, even as the nation heads toward recovery.

"It's been a harsh reality for Americans to realize that they can lose half of their retirement income because of where they have the monies invested," Moore said. "I think that while that memory is still fresh in their minds, they're going to be looking for products where they definitely aren't going to lose any of the money that they've put in. That means that indexed annuities are definitely going to benefit from that harsh realization."

According to Moore, while indexed annuities and indexed life both have features that can benefit many clients, it's rare that an agent will sell both products.

"Annuity agents, in general, don't sell life insurance. They're very transactional," she said. "The person who sells an annuity is a totally different person than the one who sells a life insurance product."

While annuity agents can be resistant to selling life products, Moore said that indexed life is growing in popularity with about $100 million of target premium written each quarter or a little more than 10 percent of the universal life market. While that isn't a dominant figure, she expects those numbers to continue growing as more carriers offer the product: In 2005 there were about 20 companies offering the policies, and she said that figure could double by 2013.

Considering that indexed life policies provide both attractive, tax-free death benefits to the client and higher payouts to the agent than annuity policies, Moore said that annuity agents would be wise to consider adding life policies to their offerings. "It would be a good idea for them to do so. I'm consistently trying to convince people who really have annuities as their mainstay product to take a look at life insurance," she said.

Agents who decide to increase their indexed business might find some objections from clients because of negative press--coverage that Moore described as largely inaccurate. But producers can help themselves by avoiding comparisons to security-based products. Moore even suggested not calling them "equity indexed annuities" because of the potential confusion; as a fixed product, she said, they should simply be called "indexed annuities."

Agents should also be careful to not overstate the products' growth potential. Double-digit gains should not be expected or advertised; instead, agents should prepare clients for perhaps 1 to 2 percent more than they might earn in a certificate of deposit, while being sure to highlight the mitigation of risk in an indexed annuity

"Nobody has ever lost a penny as a result of market downturns or market volatility in an indexed annuity," Moore said.


Clients can, however lose a great number of pennies through variable products.

Mike Cunningham, a Chartered Financial Consultant and 20-year insurance industry veteran, said that a new client recently came to his company with $1 million in assets. Unfortunately the client explained, it used to be $2 million. But Cunningham believes that utilizing an annuity's inherent benefits to meet client needs can help protect long-term goals regardless of market conditions. If the main focus is retirement income (as Cunningham believes it should always be), clients can treat a variable annuity almost like a pension, taking advantage of income guarantees to ensure a steady stream of income that won't be affected adversely by poor market performance--and that might include built-in increases. In addition, the death benefit can protect a spouse from market volatility during the accumulation phase. The costs of those guarantees, once considered a negative aspect of variable annuities, are now seen as increasingly justified as clients find value in protecting their assets.

According to Cunningham, it's important for agents to keep researching different products across many companies, even if they're already comfortable with a few reliable contracts.

"We have an obligation to the public to research and to know what is the best out there, or what is the best for the client at that time," Cunningham said. "Our job is not to get comfortable with products--our job is to get comfortable with finding the best product for each client."

Stevick also advised against growing too comfortable with a set asset allocation model. In addition to making sure a client is in the right contract, agents must give careful thought to how the assets will be invested. Current market conditions are providing great incentives for agents to be more cautious with how sub-accounts are utilized.

"I think the variable products are here to stay, and I think they certainly have their place, and maybe rather than putting all of your sub-accounts in stock funds and growth funds and so on, maybe we should spread it out a little bit better," Stevick said.

Risk tolerance and suitability will determine how comfortable a client is with different accounts, and diversification can help protect clients from experiencing painful losses that will impact their retirement goals.


Whether they're using variable or indexed products, agents should be on the lookout for contract changes as carriers adjust their own risks and react to competitive and market forces, Moore said. Regarding variable products, Cunningham noted a trend toward guaranteed withdrawal benefits (GWB)

and away from guaranteed minimum income benefits (GMIB).

He said that for clients who are forced to annuitize at age 70/2, the GMIB isn't as valuable since the guarantee could be surpassed by the amount of withdrawal required. GWB provisions, however, take that discrepancy into account and can help a client preserve their income.

With indexed products, Moore explained that agents are seeing increased minimum premiums and reduced premium bonuses for their clients. Also, capital concerns have caused companies to limit some annuity business by not allowing new agent appointments or terminating contracts and placing moratoriums on Section I035 exchanges.

Finally, policy changes aren't the only area in which agents need to do their homework. Stevick explained that many companies offering indexed annuity products are smaller carriers, and agents who are trying to increase their indexed business should scrutinize a company's background, service record and performance before investing significant client assets.

"I think you have to do the same due diligence you do all the time with your companies," Stevick said. "I think I would be inclined to start off slow--see how it goes, see what kind of service you're getting from your company and how the performance matches up with projections or expected results."


While the annuity industry received a temporary reprieve from Rule 151A--the Security and Exchange Commission's proposed rule that would treat indexed annuities as securities--when the SEC agreed to a two-year stay of its effective date, the rule will have no effect on indexed life products if and when it goes into effect. Rule 151A does not apply to policies that are regulated by state law as non-annuity contracts, including indexed life policies. As a result, Sheryl Moore, president and CEO of and said that indexed life is poised to grow unburdened by concerns of pending federal regulation.

"I think that what we're going to see is increasing sales on indexed universal life," she said.

Two other factors should contribute to indexed life growth in the future: Increased IMO participation and larger carriers issuing policies. Moore said that indexed life provides an opportunity for IMOs to diversify their product line since they already understand the product's framework due to their experience with indexed annuities. And larger carriers are looking to expand their product line to include indexed life contracts: Moore said that one or two major carriers could unveil an indexed life product in 2010, with more to follow in 2011.


Indexed annuity: An annuity whose returns are based upon the performance of an equity market index, such as the S&P 500, DJIA, or NASDAQ. The principal investment is protected from losses in the equity market, while gains add to the annuity's returns.

Variable annuity: An annuity contract that provides future payments to the holder (the annuitant), usually at retirement, the size of which depends on the performance of the portfolio's securities.

Indexed life insurance: Life insurance whose premium rate is linked to the changes in a consumer price index (CPI).

Variable life insurance: Life insurance for which the amount of the payments is determined by the performance of the underlying investments chosen by the policyholder. Agents selling such policies must be registered representatives of a broker/dealer licensed by the NASD and registered with the SEC. Choices range from low-risk fixed income funds to high-yield stock and bond funds. These accounts are typically accompanied by higher fees. Returns are generally not guaranteed and investment risk is assumed by the policyholder instead of the insurance company. Premiums remain fixed under this arrangement. As would be expected, the better the investments perform, the larger the death benefit will be.

However the death benefit will not drop below a certain minimum, regardless of investment performance.


Michael Murillo is a freelance writer and frequent contributor to the Agent's Sales Journal. He can be reached at
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Author:Murillo, Michael
Publication:Agent's Sales Journal
Date:Feb 1, 2010
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