What are the historical perspectives and realities associated with Hypothetical Models, Actual Returns, and Renewal Rates?
Hypothetical Models
Initially, many found it interesting to study hypotheticals to see how a Fixed Indexed Annuity would have performed.
In Jack Marrion’s book, Indexed Annuities, Power and Protection, he shows two hypothetical indexed annuities being purchased for every ten-year period since 1951.
One indexed annuity had a 55% participation rate, annual point–to–point annual reset method of crediting interest and no cap. And the other indexed annuity had a 100% participation rate, again with an annual point–to–point annual reset method, but with a 10.8% cap. Do you know which did better?
They both did the same with an overall annualized 6.40%.
Bottom line: Selecting an indexed annuity with the lowest spread, or highest participation rate, or highest cap does not assure the largest growth.
Actual Returns
Looking at the actual returns of actual Fixed Indexed Annuities might, arguably, be the best way to select the best Fixed Indexed Annuity. What if the index performs differently in the next 10 years than in the last 10 years; perhaps more volatility, or less? Or, if index gains occur in the last 6 months instead of the first?
Bottom line: Diversify some of your client’s retirement dollars among a variety of different Fixed Indexed Annuities.
The bigger picture: It is NOT your responsibility to select the Fixed Indexed Annuity that will have the highest contract value in 10 years over all other Fixed Indexed Annuities.
It IS your responsibility to determine if a Fixed Indexed Annuity is suitable for them, help them diversify, and potentially give them interest slightly higher than Certificates of Deposit or Traditional Annuities. Said differently, you are not promising potential double digit interest rates. Hopefully, you are promising an added way for them to diversify their retirement dollars with tax deferral and income for life via annuitization or via Guaranteed Minimum Withdrawal Benefit Rider.
