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A Winter Reflection

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We got hit with a blizzard over the weekend, as I’m sure many of you did, and we are slowly digging our way out of it. In places the drifts are rather high, and the snow takes interesting patterns and shapes, as per the photo accompanying this post.

I think that during the cold months, when we are less mobile than usual, we can take the opportunity to slow down and reflect on important themes and issues in our personal and business lives.

At present, a word that has much relevance for our industry is protection. On the face of it, such an observation is a “no brainer” is it not? Risk protection is the very essence of insurance, after all.

But more specifically, I get the feeling that in recent years, advisers and their clients have come to prefer annuities that protect assets against volatility and market downturns. We don’t hear as much buzz about annuities with exotic sub-accounts, aggressive indexed strategies or generous bonus credits. The products of the moment are registered index-linked annuities (RILAs), with their limited downside protection coupled with the potential for some investment growth. Fixed-indexed annuities (FIAs) retain appeal for those that want complete protection of principal.

A sales pitch that’s arisen – which has a hook to our topic of protection – is that of using an annuity to “lock in investment gains,” the logic being that since major market indices have reached record highs (the S&P 500 hit 70 records last year, second only to 1995), and will likely experience troublesome times ahead, perhaps now is a good time for investors to sock away at least some of their nest eggs in an annuity.

In full disclosure, I’ve been to a few retirement planning seminars that featured this pitch. At these events I didn’t reveal that I’m an annuity market researcher; I attended as a layperson and listened objectively as possible.

At these events I was disappointed that I heard little discussion of using annuities for lifetime income. In fact, after a follow-up call with one firm – in which FIAs came into the conversation – I was sent some marketing materials which included information on a lifetime withdrawal benefit, but the representatives had said almost nothing about this GLWB.

I can’t blame people for being more on the fear end of the greed-versus-fear spectrum, given current market conditions. As an industry, I suppose we can put a positive spin on matters: that individuals who buy an annuity for asset protection may eventually be convinced to use the product to take lifetime income. However, I would argue that more efforts need to be made to foster greater annuity income “literacy,” lest clients use other solutions for their retirement needs.

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