Answering sales objections about caps and interest rates on FIAs
By Chris Conklin
Insurance Insight Group
Fixed indexed annuities have a lot of features that appeal to consumers. As we describe the product to consumers, we quite often talk about such positive features as premium bonuses, index-linked interest crediting, and protection of principal.
Quite often, the sale seems to be going smoothly until the client asks, "So, what's the interest rate?" or "How much money will I make?" It's a tough question, because with a fixed indexed annuity, we don't really know the answer.
So, how do we address this question successfully? Here are a variety of ways:
The range of possibilities strategy. One way to address this objection is to better explain how the index-linked interest crediting works in two scenarios. We can show how much interest it could credit if the index increases substantially throughout the course of the next policy year. We can also show how it protects the client's principal and premium bonus if the index declines over the course of the next policy year. In doing so, we are showing our clients a range of possibilities.
Then we ask them to compare the range of possibilities with the range of their current financial product. If they own securities, they will see how the annuity eliminates the possibility of loss. If they own guaranteed products, they will see how the annuity offers greater upside potential. Either way, we show the advantage of the annuity, even though we do not know exactly what it will earn in the future.
Some producers like to show clients historical returns. After all, sellers of mutual funds face a similar challenge answering this sales objection, so they point to historical returns. Showing your clients historical returns is a good idea as long as they remember a range of historical returns, rather than as a single number. It is better for your clients to look at the historical returns and remember, for example, that they ranged from 0 percent to 8 percent, rather than to remember that they averaged 5 percent. This is because if the first year interest credit comes in at4 percent, for example. We want our clients to view that as a success, rather than as a failure.
The lifetime income strategy. Many of today's most popular fixed indexed annuities come with an optional guaranteed lifetime income benefit rider. Such a rider can help you answer this client objection because it will include a guaranteed rate of income growth and a guaranteed income payout factor. You can use these to show clients the cash flow that the annuity would generate, regardless of the index-linked interest credit. Over a client's life expectancy, most riders will generate considerably more cash than was put into the annuity by the client.
The fixed option strategy. Some agents address this objection by recommending that clients put all of their money in the fixed option strategy for the first policy year. On an annuity with a premium bonus, the growth provided by a combination of the premium bonus plus the first year's fixed interest rate can exceed 10 percent.
Certainty of return in the first year usually leads to satisfied clients, and since your clients' annual statements will show the interest rates credited on the indexed options, that can provide your clients with increased comfort about how the indexed options work. They can then better decide for themselves whether to reallocate some or all of their funds out of the fixed option into the indexed options in future years.
Let's suppose that your client is now comfortable with the concept of index-based interest crediting and fully accepts that no one can know or predict in advance how much interest will be credited. Let's review three common objections that many clients now have. For simplicity, let's assume that we are selling an annual reset, point-to-point annuity, following a stock market index that has a 7 percent annual growth cap.
Why is there a cap? To answer this question, point out that there are millions of people with money in the stock market. Every year, they are benefiting from 100 percent of any index gain and suffering 100 percent of any index loss. With a fixed indexed annuity, you will be guaranteed to suffer none of the index loss if the index goes down. Since the carrier is completely protecting you from index declines, do you really think the carrier can afford to give you 100 percent of the index increase? Of course not. Hence, there must be a cap.
Why is the cap 7 percent? Remember that the carrier is obligated to protect your account value, thus the carrier invests enough money at the beginning of the policy year in stable bond investments to ensure that it can provide that guarantee. This leaves only a small portion of the annuity reserve to be invested in an indexed-linked security, like call options. Call options are used by many carriers because, much like the interest credit the carrier has promised to consumers, call options provide a payment to the carrier if the index increases throughout the year, and they expire with no payment if the index declines throughout the year.
After investing most of the money in bonds, the carrier has a certain amount of money that it can afford to spend on call options. Essentially, the relationship between the cost of call options, the amount of money the carrier has to spend on them, and the amount of annuity account value determines the cap on the indexed interest strategy.
Why is the carrier reserving the right to change the cap every year? Call options can only be affordably purchased to cover index performance throughout the next year. Carriers cannot affordably buy call options at the inception of the annuity policy to cover the fifth policy year, for example. So, they are forced to buy new one-year call options on each policy anniversary. On top of that, the prices of call options can change dramatically from year to year. Thus, the carrier needs to reserve the right to change the cap because the prices it must pay for call options can change dramatically each year.
An important point to keep in mind is that if you look at other safe financial products that are available to consumers, their interest rates are very low. For example, according to BankRate.com, at the beginning of September 2009, the national average interest rates on bank certificates of deposit, savings accounts, and money market accounts were all less than 3 percent. So, the interest rate possibilities on a fixed indexed annuity should look very attractive in comparison.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.