Selling a fixed index annuity: three easy discussion starters
By Eric Taylor
It’s clear that producers have a tremendous opportunity to take advantage of the attractiveness of FIAs. But how can they pique the interest of their clients who may be concerned about taking any action at all given the current economic environment?
Fixed index annuities (FIAs) are incredibly popular right now. In the second quarter of 2012, year-over-year sales growth rates for FIAs topped all other types of annuities, according to the LIMRA 2012 Q2 annuity estimates. FIA sales jumped 14 percent compared to the first quarter 2011.
Just how high is demand for these products? FIAs were the only bright spot among annuities sales in the second quarter, LIMRA reported. Total variable annuity sales fell by 6 percent, and total fixed annuity sales fell by 8 percent, even though the growth of FIAs was factored into this category.
But as popular as FIAs are today, there is still plenty of room for producers to grow their businesses via these products. In terms of dollar sales, FIAs still rank behind variable annuities and other fixed annuities. In the second quarter of 2011, FIA sales reached $8.6 billion, while variable annuity sales hit $38.6 billion and all other types of fixed annuities sales totaled $9.8 billion.
It’s clear that producers have a tremendous opportunity to take advantage of the attractiveness of FIAs. But how can they pique the interest of their clients who may be concerned about taking any action at all given the current economic environment? Here are three easy techniques to get your clients talking with you about FIAs.
1. It’s all relative
The first item to discuss is how much money your clients have sitting on the sidelines, providing little or no growth to their overall portfolio. As of September 2012, the Federal Reserve reported that there was close to $10 trillion in retail and institutional cash sitting in highly liquid, low-interest accounts. According to bankrate.com, on October 4, 2012, money markets were paying, on average, 0.12 percent.
So, how to get your clients off the sidelines and into FIAs? Producers need to explain that the growth opportunities with FIAs are relatively good versus other options — especially when clients factor in the safety of their principal and the many benefits annuities offer (more on this later).
Today, producers can easily find a seven-year FIA offering a guaranteed yield of 2 percent with index crediting options offering growth potential of 4 percent. On the other hand, the most popular alternative products that offer safety are paying substantially less. The average national yield on a five-year CD was recently 0.98 percent, according to bankrate.com.
In short, don’t talk yourself into the idea that your clients won’t be attracted to FIAs because of today’s low interest rates. Be sure to discuss FIAs’ better yield opportunities to help give your clients the potential to grow their money safely compared to many other “sideline” alternatives. 2. Safe and sound
Why are so many investors and their cash sitting on the sidelines? The simple answer is that your clients are nervous. Stock markets can be volatile. Add in fears of the Eurozone crisis and a slow economic recovery and clients don’t know where to look for solid, safe growth potential.
In January, the Fed signaled that it would hold short-term interest rates near zero through 2014. Your clients need to be reminded that not only do most FIAs currently offer a growth opportunity at or above the consumer inflation rate (now 1.7 percent), but their money can safely accumulate. Each year, interest added to their contract is locked in and cannot be lost due to a future decrease in the market index.
If the past five years have taught us anything, it's that no one can safely time the market. For example, the yield on 10-year U.S. Treasuries has fallen by more than 60 percent. The global financial crisis and the Eurozone crisis have taught us that we can’t predict where equity returns or interest rates will be in any given year.
With an FIA, you can give your clients the confidence that their money can continue to work for them, no matter how Wall Street is performing or how the Fed is moving interest rates.
3. Don’t tell them, show them
One mistake that many producers make is overlooking the tools they have to help clients understand the potential upside of FIAs. One of the best is a detailed illustration. Be sure to work with a carrier that offers illustrations that you can customize for each client, with their name, and be sure to plug in your client’s actual dollar figures.
Illustrations are vital for showing clients how their money can grow and how the guarantees and other features in their chosen FIA come into play. Don’t assume that a client understands the vast difference between earning less than 1 percent in a cash account and 2 percent or more with an FIA.
With an illustration, it is likely that a client will react more favorably to seeing their own money’s growth potential over time to be hundreds or even thousands of dollars more than their current product choice. They will be more likely to listen intently to other benefits offered by the annuity such as tax-deferred growth and guaranteed lifetime income options.
Fixed index annuities are obviously selling well. But with so much investor cash sitting on the sidelines, producers have ample opportunity to move more client dollars into these outstanding products. With so much uncertainty in the global economy, FIAs can provide your client secure accumulation opportunities, relatively good returns with principal protection and, equally important for many, the option to create predictable, guaranteed retirement income for many years to come.