If there is a large growth in the index over the term of the crediting strategy, the uncapped method may produce the best result. But it is not always the case.
Recently, like many of you, I received a cold call from a marketing company offering an indexed annuity
that is, in the words of the marketer, "uncapped." This keyword was used more than 10 times over the course of the phone call — this marketer is well-trained to position this product against what I'm currently offering.
But what does "uncapped" really mean?
The word "uncapped" creates an idea that a person can participate in all of the gains of the index with no limits placed on them by caps declared by the insurance company. This is pretty darn attractive to consumers.
"A program that I believe will fit your financial goals offers no risk due to market fluctuation while at the same time giving you uncapped growth potential."
Pretty good sales pitch, huh?
Uncapped is not limitless
The problem with this is that growth is still limited — it must be if it is a fixed indexed annuity
. Most of the uncapped products that I have seen limit gains by forcing a specific allocation, offering either a participation rate or spread/asset fee, or combination of these elements.
The spreads on uncapped strategies are currently as high as 8 percent. The participation rates are as low as 15 percent. Does uncapped still sound sexy?
Maybe it does. If there is a large growth in the index
over the term of the crediting strategy, the uncapped method may produce the best result. But it is not always the case.
I recently ran a back-test, pitting one of these uncapped products with an FIA currently offering a premium bonus, 6 percent annual cap and 2.75 percent monthly cap. Which product won the battle? Neither.
At differing periods, one company is better than the other. The products are pretty much equal over long periods of time. Liquidity, rider fees, surrender charges, commissions and all of the other important things in pricing annuities differed from each company, but when it comes down to it, the uncapped method is simply another option for us to use.
It's not always better, though marketers may want us to think that, but it's also not something we should dismiss, either.
Understanding the products
One advantage for producers in comparing FIA products
is to know something about annuity pricing. Are you looking for a 10-year product with a 12 percent bonus, 7 percent compound rollup for 20 years, 4 percent fixed rate and 11 percent commission? There are products that currently offer all these features, but they aren't on the same product. That is impossible for insurance companies to offer.
Insurance companies must price fixed index annuities within the means of their investment portfolio. There isn't much difference in the portfolio from one company to another, provided they are a highly rated company. Therefore, the products must be priced around similar parameters.
The features — premium bonuses, interest rates, riders
, surrender charges, commissions, etc. — of an annuity product can change from product to product but, again, they must fit within the companies' investment portfolio.
Here is an example. How is it that a company can have an 8 percent rollup on an income rider, but have lower payouts than a company with a 7 percent rollup? Because they have priced the products differently.
The rider fees are different percentages and are calculated differently, the commissions
on the products are different and the caps are lower at one company — you get the picture.
It's the same way with the uncapped strategies. They are priced to offer around the same result as other crediting strategies.
There is give and take with each product that we sell. It's our responsibility to know where that give and take resides and how to best communicate those things to our clients and prospects.
The point of this article is not to discount uncapped strategies. The point is to put them in their place. They are not limitless and sometimes are not the best fit for the client. If we choose to sell these products, we must be careful in how we explain them so that we do not mislead our customers.
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