My first encounter with an FMO and their pitch on index annuities was many years ago. My main recollection was a guy literally screaming the word "evil" from the back of a large room every time the phrase variable annuity was mentioned. And, with the tumultuous behavior of the stock market as evidenced by the S&P 500 index, it's no wonder that many insurance product salespeople would side with the scary screaming man in the audience. And since then (almost 10 years ago), index annuities have had a wonderfully rewarding run for clients and for the agents.
But staying abreast with information and trends as times change is one key to you and your practice's continued success. While index annuities have been profitable products for almost everyone (investor client, agent and marketing organization included), the next 10 years in our industry likely won't look like the previous 10 years. Why not? Primarily because the yield on 10-year Treasuries have declined from a once lofty 5.5 percent to a dismal 2 percent (or less), with no indication they will rise for at least a couple more years, (according to Ben Bernanke's testimony).
The other truth that is often forgotten or overlooked is that the actual "real" total return of the S&P 500 index going back to September 1998 through September 2011 has averaged nearly 3.5 percent annually*. So, while a hypothetical $100,000 investment into the S&P 500 index grew to only approximately $108,000 without dividends reinvested, the actual return explodes to nearly a whopping $145,000 once the dividends are added back in the equation. Many index annuities with annual resets did beat the famous index during the period referenced, but unless interest rates increase (and very soon), it will be much tougher for an index annuity's repeat performance of "outperformance."
Zero is not your hero
