Why clients want the new fixed indexed annuities

While some hybrid fixed indexed annuity products are marketed as employing an "uncapped" indexing strategy, it is important that clients understand that this does not mean that the products allow for 100 percent participation in any market gains. In order to offer protection against downside risk, the carrier imposes a cap on the level of the client's participation.

Often, gains are credited to the client's contract annually — a crediting method often referred to as "annual point-to-point" — or even monthly in some cases. However, these gains may be subject to a rate cap that limits the participation to a certain percentage of market gains. In other cases, a "spread" may be used to minimize the risk to the carrier. A spread is essentially a fixed percentage that is subtracted from any gain that the indices generate within a set period. For example, a 4 percent spread would simply reduce a 10 percent gain for the year, so that the client's account is actually credited with a 6 percent gain.

Essentially, it is important for clients to realize that the potential for growth in these relatively new indexed annuities is not unlimited and that it is important to read the fine print in order to determine the particular limitations that do apply.

Conclusion

Fixed annuity products are trending generally because of the guarantees they offer, but for the client who is interested in participating in market gains with the potential for allocating risk between a variety of traditional and non-traditional indices, the new crop of hybrid fixed indexed products might provide the right fit.

For previous coverage of developments surrounding indexed annuities in Advisor's Journal, see Indexed Annuities: A Swiftly Tilting Product Class.