The Buzz On Bonus Equity Index Annuities

Many such clients own mutual funds that dropped in value by 50% or more over the past three years, he says.

"Some were told, when they first entered the stock market, that the safe way to go was asset diversification," Tucker says. "Now, though, they see that stocks, mutual funds and variable subaccounts dont have a safety net." Some tell him they are "sick and tired of the market" and they "need to do something else."

What these clients really value, surmises Tucker, is safety of money and not losing principal.

Accordingly, he positions the bonus index annuity as a product that will enable them to grow their money in a way that fits with their values. The product can do this, he says, because it has a guaranteed interest rate, the bonus and the upside potential from the interest linking.

BIAs are for the long run, Tucker stresses. Presenting them "should focus on values, not performance of assets."

Despite the sales opportunities and successes some producers have seen, other producers have their reasons for steering clear of the product.

A common complaint is that, in order for an insurer to offer an attractive bonus, the insurer has to take something away, says Kaselnak, the Rochester, Minn., producer. "The bonus has to come from somewhere, and thats going to be either the agents commission or the policy design," he says.

Example: The client may choose a BIA with a longer than average surrender charge–say, 15 years–in order to get a big upfront bonus–say, 10%. In this case, says Kaselnak, chances are the client wont come out ahead. Such products tie up the clients money for a long time, he explains, and they tend to pay higher commissions, thus minimizing growth potential.

(Note: Tucker, who sells BIAs with a long surrender charge and a strong bonus, agrees that liquidity may be a concern for some clients. However, he says that in the product he sells, the owner can surrender the policy after four years and get 100% of the principal back, after charges. When clients learn about this, he says, it "helps eliminate fear of locking up the money for too long.")

Some other BIAs make the bonus conditional on death or annuitization, says Kaselnak. Still others apply market value adjustments.

If the agent discloses whats in the product and the client still buys, he says, thats OK, assuming the BIA is a suitable product for the client.

"And if the agent offers, say, a 7% bonus and takes a 50% cut on the commission, thats viable too. That way, we all share the pain–and some gain.

"But I am concerned that very few agents explain the details or what will happen in the subsequent years," Kaselnak adds.

Humphrey, the Madison, Wis., broker, says he tends to avoid selling BIAs because he believes "many are too complex and they have too many moving parts" (in order to compensate for the bonus). If Humphrey sells a BIA at all, it will be one with a shorter surrender period ("seven years is reasonable") and a lower commission ("6% to 8% is reasonable").

"It has to be a sound product from a strong company, with a meaningful rate of return and a good enough commission, that doesnt expose the consumer to risk," Humphrey says.

The products that pay a modest first-year enhancement, say 1%, and have a shorter surrender period are "more straightforward," agrees Koeniguer of Kansas City. "This helps with the integrity issue, and it wont hurt the customer, especially if the costs are spread out over, say, seven years."

Marrions suggestion for producers is to "remember that there is no such thing as a free bonus."

Agents need to understand where the bonus is coming from, he stresses. "Compare the products, the bonuses, the compensation levels and the other features. And see if there are strings attached."

Consumers today are using bonus products to make up for the market losses and as an alternative to the low interest rates in todays environment, points out Foley of Allianz.

In presenting the product, therefore, producers should find out not only the clients needs, he says, but also what the client wants to do–i.e., make up for market losses, etc. Then, says Foley, look at the product performance based on the needs and wants of the customer; find a company with ratings that suggest outstanding safety; and look at the commission structure.

As for index annuities in general, whether bonused or not, Humphrey predicts they will not gain major market expansion until distribution spreads to wire houses and registered representatives.

Such channels "have traditionally been cool to index annuities and to any insurance-based product that has the word equity in it," Humphrey allows.

However, he has noticed that some are now showing interest in equity index insurance products–if the products are "easy to explain and of high consumer value."

Therefore, he is urging the index industry to move design–including design for BIAs–in that direction.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 11, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.