Thursday, April 25, 2013

Insurance Agents and Companies Facing Tough Times

In my humble opinion, I believe that insurance agents and companies that sell annuities primarily, are having a rough go of things. There are four main types of annuities that are sold by insurance agents. There are also other types such as hybrid policies, but we will save that discussion for another blog article. The four main types are as follows:

  1. Fixed Annuities
  2. Indexed Annuities
  3. Variable Annuities
  4. Single Premium Immediate Annuities
Fixed annuities are where the insurance company declares a rate of interest based on current market rates and agrees to pay the annuity policyholders that rate. The problem right now is that these rates are 2% and less, so they are pretty much unappealing to consumers. The agents who normally sell these annuities are finding it very difficult to sell these, so they have gravitated to Indexed annuities.

Indexed annuities, when rates were higher, were real popular. A quick refresher on Indexed annuities is in order here. Indexed annuities, like their name implies, is based on an index such as the S&P 500® index. My dad was an insurance agent and was full of quips and jokes about insurance companies. One of my favorites of his related to when an insurance company changed the terms of their products. For example, Indexed annuities. When my dad found out that the old policies were not as favorable for his clients, he would quip..."that was the old deal. This is the new deal." You see, insurance companies have a routine. They come out with great products and push their agents to sell, sell, and sell some more. Then, after they get the policies on the books, they basically screw these customers.

For example, when Indexed annuities first came out, you could get cap rates around 10%. This means that if the S&P 500 made 10% or more, then your annuity would be credited with 10%. Sounds great, doesn't it? What the agent did not tell you was the insurance company has the right to change the cap rate anytime they please. So, after these customers bought these Indexed annuities with 10% cap rates, a scant few years later find out that their cap rates have been lowered to around 2.75%. This means that if the S&P 500 makes 15%, then you get 2.75%. As my dad would say..."that was the old deal. This is the new deal."

Of course, then we have another annuity type, the Variable annuity. Insurance companies made a major mistake with these products, too. They put all these Guaranteed Benefit riders on them and now they find themselves not being able to live up to the guaranteed part. In fact, several companies have even gone so far as to try and buy the guarantees back from their policyholders. If these insurance companies have resorted to this measure, then perhaps it might be time to take notice. Especially, if you have one of their Variable annuities.

Never mind the fact that most insurance agents have no clue how to invest these Variable annuities on your behalf. Nor never mind the fact that the expenses on these can run easily close to 3% a year, not even counting the commission that you have to pay.

Finally, we have the Single Premium Immediate Annuities. This is where you give the insurance company your money, let's say $100,000, and then they agree to pay you an income stream for life,  or one of their other payout options. In the past, when market interest rates were 6 or 7%, these were good options to consider. However, today with current interest rates so low, the SPIA's, as they are called, are only crediting you about 0.25% over the life of you annuity. Instead of getting 6% in interest on the income stream that you receive, you will only get the paltry 0.25%.

Insurance agents using a bucket approach have found themselves in a quandary. The bucket approach does not work with SPIA's right now. When rates go back up, then these will probably come back into vogue, but not right now. The bucket approach is a split annuity approach where you use a SPIA and also a deferred annuity. You combine the two to grow back to your original investment in 5 years. The problem is that the numbers do not work very well unless interest rates are high.

When you look at all of these products, it is apparent that insurance companies and their agents are running out of viable options to sell to clients. Here is why:

  1. Do you want to buy a Fixed annuity that pays 1% and you are locked into it for 10 years?
  2. Do you want to buy an Indexed annuity that while the stock market is going up over 10%, you are only getting 2.75%? Plus you would be stuck in it for 10 years?
  3. Do you want to buy a Variable annuity with guarantees only to find out that the insurance company is in financial trouble and they want to buy the guarantee away from you? Plus you would be stuck in it for 10 years knowing they might not be able to pay you at all?
  4. Do you want to put your money into a SPIA where you cannot get your money back with most payout options? A SPIA where they only give you your own money back plus a smidge in interest? Does that sound good to you?
Tough times are happening for insurance companies and their agents who sell these annuity products. These agents are crying in their beer right now. The old process of running a seminar doesn't work. These agents were okay spending $6,000 to put on a seminar when they had high interest rates, because they were selling annuities like beer on a troop train. Now however, they do not have appealing annuities to sell. They have been losing money on these seminars, because no one is buying these four products like they used to when rates were higher. Some old guard agents are trying radio and TV with ads like..."we have never lost a penny of our client's money." Sad fact is they are not making much money for their clients either and the guarantees are at risk.

If you own any of these annuities, then you may want to obtain a second opinion from an unbiased source. You may not be getting what you thought you were getting when you bought it.

Remember what my dad said. That was the old deal. This is the new deal.

A second opinion is always in order.