The past twenty years have brought many changes to the annuity marketplace. In 2001, indexed annuities paid commissions in the range of 15-25% and had surrender periods averaging 19 years. At that point in time, there were no state suitability rules, and these products were not regulated by FINRA or the SEC (they still do not fall under securities rules). In 2003, the National Association of Insurance Commissioners (NAIC) drafted the Suitability in Annuity Transactions Model Regulation. It required insurers and producers to make a reasonable effort to collect financial details and investment objectives for the purpose of having reasonable grounds for recommending annuity products to clients. In 2005, the National Association of Securities Dealers (NASD, now FINRA) issued Notice To Members 05-50 setting out broker-dealer responsibilities for supervising sales of unregistered equity-indexed annuities. At that point, the tide turned on indexed annuities.
Today, we have a variety of annuities available, and each has advantages and disadvantages. The latest entrant to the market is the registered index linked annuity (RILA), also known as a structured annuity, buffered annuity, variable indexed annuity or indexed variable annuity. These work by setting a floor or a buffer of protection. The RILA floor is the maximum percentage loss a customer is willing to absorb during a down market. Any losses beneath the floor are absorbed by the carrier. A buffer is the percentage loss that a customer does not wish to absorb. A customer is exposed to losses to the extent that the linked index losses exceed the buffer. The upside gain is often capped to the same extent that the downside loss is limited.
Example: If the floor is 10% and the index declines by 15%, the annuity owner will absorb the first 10% loss, and the insurance company will absorb the remaining 5%.
Example: If the buffer is 10% and the index declines by 15%, the insurance company protects the annuity owner from the first 10%, and the owner absorbs a 5% loss to their annuity.
The upside potential is linked to an index and limited by a growth factor. This allows customers to participate in market growth without the risk of investing directly in the market. The only fees are associated with riders or early surrender or withdrawals. Like other annuities, the customer can select from a variety of payout options, depending on their needs.
Numerous carriers offer RILAs. Some are Brighthouse, Great American, Lincoln, Athene, Nationwide and Lincoln. Micah Hesting has written articles about most of the RILA products that are available, and those may be accessed in our Word on the Street archive.
In the investment risk spectrum, RILAs are higher risk than indexed annuities but lower than variable annuities. Inflation risk and interest rate risk should also be considered in recommending annuities.
Annuity Types in Ascending Order of Investment Risk
Fixed annuity:
Customers receive a guaranteed interest rate over the time period specified by the payout option.
Fixed-indexed annuity:
Customers receive a guaranteed interest rate as well as additional returns if the linked index increases in value. Payments continue over the time period specified by the payout option.
Registered index-linked annuity:
Returns are not guaranteed, but rather are linked to a stock market index with capped gains and limited losses. Often recommended if the customer has 5-7 years to retirement or is already retired.
Variable annuity:
Gains and losses are tied directly to the underlying investment portfolio, which can be equity and/or fixed-income funds. Customers have no protection from downside loss, no cap on upside gain and no guaranteed return, unless customers purchase a rider, such as a guaranteed minimum income benefit (GMIB) rider.
RILA sales were $8.3 billion in the fourth quarter of 2020, a 68% jump from fourth quarter 2019 and 33% higher than the $6.3 billion recorded in third quarter 2020. In 2020, RILA sales were $24 billion, up 37% from 2019 sales. RILA sales represented nearly a quarter of all VA sales in 2020, according to preliminary results from the Secure Retirement Institute® (SRI®) U.S. Individual Annuity Sales Survey.
According to the same SRI® study, in the fourth quarter, fixed indexed annuity (FIA) sales were $14.3 billion, down 15% compared with fourth quarter 2019 results. After record-breaking sales in 2019, FIA sales fell 24% to $55.7 billion in 2020.
At The Leaders Group, $79 million of RILA premium were sold in 2020. That compares to $85 million of variable annuity premium and $62 million of indexed annuity premium.Remember, all annuities are long-term products. Annuities are complex products, and each type has advantages and disadvantages. Registered index linked annuities and variable annuities have a risk of substantial loss of principal and related earnings. Despite the risks and complexities, annuities may have a place in your customer’s retirement plan.
Jane Riley
Chief Compliance Officer