The index annuity sales model for the last decade was to offer consumers the hope of earning a much higher return than they could get from CDs. That model is dying.
One reason is tougher regulation, but the major reason is lower yield. In 2008 my Compendium Composite Bond Index showed 7 percent yields, and by the end of last year they were less than 5 percent and could drop even lower this year. What this means is it will be more difficult to sell on rate, more difficult to do annuity exchanges, and more sales will be needed to earn a living. Producers need to evolve to succeed. Here are some suggestions:
- Sell benefits, not rate: If I earn $1,000 in CD interest, I have to pay taxes on that interest. If that $1,000 is in an annuity I decide whether to pay taxes this year. Owning an annuity means I control my taxes–not the IRS.
- Educate consumers: Financial decisions are always comparisons. If the consumer thinks a 3 percent to 5 percent potential return is too low, ask them what else they would do–CD rates are 1 percent or less. If the index annuity captures a 5 percent return in 2011 that is equal to 5 years of bank interest.
- Sell safe income, not growth: With lifetime withdrawals benefits you can tell the consumer exactly what premium is needed today to produce an income of $10,000 a year tomorrow. The producer is talking to retirees that have witnessed the interest income from the $200,000 in CDs fall from $10,000 to $1,300. Tell them you can guarantee them $10,000 in income for a lifetime.
- Diversify: Whole life insurance offers guarantees, which is why it is still around. More than half of retirees have set money aside to try to cover nursing home expenses–do they know about annuities with LTC benefits?
- Evolve: Low bond yields could stay with us for years, but even if rates do begin to track back up, the old annuity producer model is gone. There will be a winnowing of producers this year, but the producers that remain will do more business with a more diversified model that will result in long-term success.
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