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Variable Indexed Annuities Are on the Rise — Here's What Insurance Agents Should Know

by Precise Leads

March 1, 2018

Variable indexed annuities shined brightly in an otherwise flat variable annuity marketplace.

In an otherwise lackluster market for variable annuities, variable indexed annuities, also known as buffer annuities or structured variable annuities, have garnered a surprisingly large share of total investments. Recently released statistics from LIMRA reveal that sales of variable indexed annuities rose by 25% to $9.2 billion between 2016 and last year, even as total variable annuities sales fell by 9% to $95.6 billion over the same period.

Todd Giesing, Director of Annuity Research at LIMRA Secure Retirement Institute, attributed the sector’s “impressive growth” to sales through the independent broker-deal channel. “Structured annuity sales continue to attract individuals looking for a balance between investment return and downside protection,” Giesing said in a statement.

What Is a Variable Indexed Annuity?

As its name implies, a variable indexed annuity is a blend of a variable annuity and an indexed annuity, providing investors with a measure of downside protection in the event of a market slide while allowing them to capture more gains when the market rises.

It strikes this balance by establishing either a “buffer” or a “floor”, or a solid cap on the investor’s liability. For example, if a variable indexed annuity contract has a 20% buffer against a market downturn, an investor’s account would lose only 20% of its value if the market drops by 40% over the term of the annuity because the insurer bears the first 20% of the market’s loss.

Variable indexed annuities can also be written with a floor beyond which the investor will not suffer any losses due to a market drop. If the floor is set at 5%, then the investor loses only 5% regardless of how far the market falls. In contrast, indexed annuities typically insure against any loss of the investor’s principal.

Unlike indexed annuities, however, variable indexed annuities offer a higher upside by raising the limits on the credited interest rate in the contract. Chris Finefrock, VP of Investments at independent broker-dealer ValMark Securities, Inc., told Investment News that indexed annuities are typically capped at 4.5%, meaning that the investor realizes only a 4.5% gain even if the market rises, say, 10%. In a variable indexed annuity, the cap ranges between 8% and 9%.

Who Should Invest in a Variable Indexed Annuity?

Variable indexed annuities appeal to investors who can tolerate a bit more market risk, but also want some protection from market downswings. Since these products potentially allow investors to grow their retirement assets before retirement, and market fluctuations make the income stream less secure, variable indexed annuities function better as an accumulation vehicle than a source of income during retirement.

These products tend to be more complex than indexed annuities. Rather than invest in mutual funds, variable indexed annuities lean toward riskier investments such as emerging market funds or REIT index options.

Only a small number of insurers currently offer variable indexed annuities, including AXA Equitable Life Insurance Co., Brighthouse, Allianz Life Insurance Co. of North America, and CUNA Mutual. Great-West Financial recently joined that group with its index-linked variable annuity.

Although they account for a small portion of the overall variable annuity sphere, variable indexed annuities address current investor concerns about market volatility. As a result, many advisors believe that their sales will increase. “We've had a bull market for about nine years now, and clients are trying to lock in some of their gains and hedge some downside risk," Jessica Rorar, an investments planner at ValMark Financial Group, told Investment News.

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