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Tired of pulling teeth to find “competitive” annuities to present to your prospects? Listen as Sheryl J. Moore, the indexed annuity expert, discusses why now is the best time to sell indexed annuities.

Sheryl will enlighten you on product development trends, regulatory updates, and new non-traditional insurers that are jumping into the indexed annuity market.

Sheryl Moore: Hi. I want to thank everyone for joining us today. WealthVest Marketing is sponsoring me to come on and speak a little bit out battling low interest rates with index annuities. My name is Sheryl Moore and I’m the president and CEO of Moore Market Intelligence. Many of you are familiar with me. We helped to develop a competitive intelligence tool such as annuityspecs.com, lifespecs.com and the Indexed Sales and Market Report that’s distributed by annuityspecs.com, so thank you all for joining today.

Kind of just want to try and give everybody a pick-up and talk about why this is a great time to be selling indexed annuities. I know that the low interest rate environment is enough to get any of us down, but there are really some bright spots. First, let’s talk about these historical low interest rates. When we talk about indexed annuities and what products compete against indexed annuities, we’re definitely not talking about variable annuities with living benefits.

We need to compare with what’s called a Safe Money product to other Safe Money products, or products where you can’t lose any of your money as a result of market fluctuation. One of the primary places that we find Safe Money products, other than indexed annuities, is through a bank. And right now, I just went out to bankrate.com and pulled current rates for bank products. Right now certificates of deposit are averaging less than 1/3 of 1%. Who would have ever thought that rates would ever get that bad? I know there aren’t people out here thinking wow – great. This money that’s been sitting in my bank account is now going to renew at 1/3 of 1%. So it’s really hard for banks to make a value proposition right now with those products, and even checking accounts are averaging less than ½ of 1%.

Another Safe Money product that people have traditionally used in the past for retirement funds are savings bonds. Actually, I purchase savings bonds for my nieces and nephews all of the time to help with their college education, but I recently quit buying them because, as you can see, savings bonds on the Series EE are currently only paying 0.6% and this is just laughable. Series I Bonds are crediting 0% with an inflation component of 1.53%. Not sure if anybody on the line has checked the rate of inflation lately, but I’ve got to tell you, it’s a lot higher than 1.53%. So still those Savings Bonds are not necessarily a competitive place to put your retirement funds and make sure that they’re safe from market fluctuation.

The other product that competes directly with index annuities is fixed annuities. And right now those rates are better than what they are on CD’s and savings accounts. But certainly the average rate of 1.98%, that’s being credited to fixed annuities, is by far not attractive. In fact, for any of you on the line that have been in this business 20 years or so, I’m certain that you can say that you have blocks of business that have fixed annuities with minimum guarantees of 4 and 5%, but this is the current rate of less than half that. So it certainly is a very challenging time to be selling fixed and indexed annuities.

Now indexed annuities are relatively competitive as compared to fixed annuities. Currently on annual point-to-point crediting methods, we are averaging ½ of .035. Now I know that doesn’t sound like a fabulous value proposition because the client could get 0, they could get 3.05, or they could get something in between. But certainly it is more attractive than the rates that are being credited on fixed annuities, so relative competitiveness is very, very important to keep in mind. And I will tell you that consumer’s expectations of what they’re looking for in a retirement saving’s vehicle have definitely changed, so we’ll talk more about that a little later on.

But how did we get to this point where we are facing historical low interest rates? The class of the economy back in 2008 certainly has not helped anything. We’ve got the monetary policies of the passing current legislation. I think I heard that Bernanke was releasing more money today; and then supply and demand and what else? You know you probably wouldn’t draw this conclusion, but insurance regulation has had a lot to do with the rates that are being credited on indexed annuities and fixed annuities today.

One big reason for that is this thing called the 7010 Rule. Some of you may have heard it referred to as the 1010 Rule in the past. The 7010 Rule is the more appropriate name for the rule. But this is essentially where specific states have said, “Look, insurance companies, if you want to sell fixed or indexed annuities here, that’s fine with us, but if you submit an annuity that has a surrender charge of longer than 10 years, and sometimes even more than 10% in the first year, we’re not going to let you sell them here.” So all annuities offered through the state must have a surrender charge of less than 10 years, and often 10%.

So there are specific states that have said they’re implementing this rule. And this is a big deal because we are a state regulated industry, so there are going to be some states that are using the 7010 Rule and others that aren’t. Now when you limit the surrender charges on an annuity, you are not just limiting surrender charges, you’re also limiting the premium bonuses on the product because really, if you take a look at it, all other things being equal on a 10-year surrender charge, it’s really hard to fit a 10% premium bonus on that product. Because the way that an insurance company prices for the risk of offering that big premium bonus which, by the way, is a very desired feature because it’s on 70% of all indexed annuity sales. The premium bonus is generally offset by a higher or longer surrender charge.

Certainly we’ve seen some new innovation. Like the use of vesting schedules or recapture charges that can help in sharing that risk a little bit with the policy holder so that the insurance company says, “I’m willing to offer this upfront bonus that you find attractive, but if you do cash surrender more than your penalty-free amount on the annuity, we’re going to reserve the right to take some of that premium bonus back. So we have been able to come up with some product innovation to work around that feature. But with commissions, there’s not a lot we can really do because when you limit the surrender charges on a fixed or indexed annuity, you are reducing the commission that can be paid to the agent.

One other thing that I guarantee the regulators are not thinking about when they are implementing this rule, is that when you limit the surrender charges on an annuity, you’re also limiting the amount of credited interest, or in the event of an indexed annuity, the amount of cap or participation rate that the indexed annuity policy holder will receive. Because if I’m a consumer, and I give a $100,000 to XYZ Insurance Company for a fixed annuity, they’re certainly going to make more money off of my premiums over a 15-year period than they would over a 5-year period. And because they’re able to invest those premiums for a longer period of time, they do have higher potential for gain and they are, therefore, able to pass on more of those gains to me as a policy holder.

So I’m not a real big fan of this 7010 Rule. I really think it’s anti-competitive. You’ll see here on the slides that initially we just had a few states that were implementing this rule, and this is something that I’ve really rallied against for the past eight years because I do work in competitive intelligence, so I believe in offering competitive products. But what this rule does is essentially commoditize products. As you can see, at first we only had a few sparse states that were using this rule. Now not to disparage folks who do business in Alaska or Utah, but back in ’08 insurance companies might have said, “Yeah, you know, we do have some 12-year annuities and some 14-year annuities, but what percentage of our sales are coming through Utah and Alaska? We’re totally okay with not having our 12 and 14-year products approved in those states because we really don’t get a lot of sales of those products through those two states anyway.”

So initially the reaction was this isn’t a good thing and yes, maybe it’s affecting a couple of states that we have a considerable level of sales in, but nobody was really panicking at that point. I will say that today it’s a little bit different. We have so many different states that are using some version of 7010. I think more than 25% of our nation is using some version of it. But keep in mind, some states might say, “Well we’ll go ahead and approve this annuity that is 7010 compliant, but we’re not going to allow you to have a market value adjustment on it.

Some other states might say, “Well you know what, you’ve got an upfront 5% premium bonus that’s credited to the account value on this product, so even though we’d normally say we want your first year surrender penalty to be 10%, we’ll let you have it at 15% because a 10% penalty plus your 5% guaranteed upfront bonus is 15%. It’s effectively a net surrender penalty of 10%.”

So every state has their little nuances. I will tell you of very strong interest to everybody on the line, if you’re familiar with the case of the agent in California, who recently went to jail for making an unsuitable annuity sale, you’re going to have interest in the state that’s in blue there. 20% of our nation’s seniors live in the state of Florida. We certainly have a lot of financial services professionals that are doing business in that state. Recently, the state of Florida’s Insurance Commissioner actually tried to implement a 55 Rule where annuity surrender charges would be limited to 5 years and 5% in the first year.

Now I’m sure all of you have noticed we’ve seen short-term annuities disappear from the market. Because rates are so bad, the insurance company cannot even offset their cost in those shorter-term products, which essentially means that 20% of our nation’s seniors would be being sold mutual funds for Safe Money Resources. Luckily, we were able to get them to adopt the version of the 7010, as opposed to the 55; however, they have adopted some very strict regulations if an insurance agent in the state of Florida is to make an unsuitable annuity sale, and they’re not much different than the rules in California. So be aware. Definitely some stricter things since you should be even more aware of suitability if you’re doing business in the state of Florida.

That Safeguard Our Seniors Act is a little bit different from the versions of 7010. Not just because they’re imposing greater penalties for unsuitable sales, but they are also allowing an exception to the 7010. For those of you who are registered reps, you’ll recognize the language. If the client is an accredited investor, they will permit them to have an exception from the 7010 Rule. Now keep in mind, however, that the carrier you’re doing business with might say, “Well we don’t care that Florida is allowing you an exception. We don’t want to accommodate the exception. So there are only a couple of insurance companies who will allow that loophole should your client qualify for it. But it is definitely something to be aware of because that is a state that accounts for a lot of sales of fixed and indexed annuities.

The other thing that’s really been limiting the surrender charges on fixed and indexed annuities is this offshoot of the National Association of Insurance Commissioners. And this offshoot is called the Interstate Insurance Product Regulation Commission. What a mouthful. I like to just refer to it as the IIPRC. Basically this subgroup of the NAIC is this structure that has attempted to make filing products, like life insurance and annuities, timelier, cost efficient, and just simpler for insurance companies.

Here’s how it works. Forty-one different states have said, “Hey, we want to be members of this IIPRC.” So if I’m an insurance company, and I want to offer a new indexed annuity in, let’s say Minnesota, Iowa, Illinois, Missouri, what I have to do is go and file my annuity with Minnesota, Illinois, Iowa, and Missouri individually.

For that reason, typically when an insurance company decides to offer new product, they’ll end up having about 13 different versions of that annuity on their administrative system. Because when I file in Minnesota, there’s a chance Minnesota will say, “Yes, we’ll approve this annuity, but you know what, we’re not going to allow you to offer the fixed strategy on the indexed product in this state.” And California might come back and say, “You know, we’ll let you sell this annuity here, but we’re not going to allow you to offer the surrender charger waivers that are on it.” So every state has their own little nitpicky details where they’ll say we’ll approve a variation of the product. That ends up being very costly because you have to pay each state individually, and then each state might have several objections to your filings that you’ll have to work through, and it’s not very efficient.

Having worked from the home office, typically we would roll out products as soon as the majority of the states had approved the product for sales, and sometimes that meant 35 out of 50 states. It might take a long time to get the other 15 states to approve it. The way the IIPRC works is those 41 states that have opted to be in the group have said, “Look, if you decide that instead of filing your annuity through the states individually, Missouri, Illinois, Iowa, Minnesota, what you can do is file it through the IIPRC. And if we approve the annuity, then it’s automatically going to be for sale in all 41 states that are members of the compact.”

Well that being said, yes that’s incredibly time-efficient, and you get speed to market, and the cost is so much lower. So there really is an incentive to do it. But you know what? The Interstate Product Commission uses 7010 as the basis for approvals of their fixed and indexed annuities. So before where this was a state level issue, now is becoming an even bigger issue because we have 41 states that are members of the compact and oh, guess what? Now we’ve got this other thing that has made 7010 a distribution issue. Where before we might have had some states that were maybe not big in terms of sales for the 7010, and insurance companies might say, “Yeah, you know Alaska and Utah really don’t account for a large percentage of our indexed annuity sales, so we’re not going to worry about making our products 7010 compliant.”

Well then there was a huge shift in August of 2005 and they issued this notice to members – to member firms back in August of 2005. Essentially what this notice said is, “We want broker dealers to treat indexed annuities as if they are securities, regardless if they are or not, because we feel that at some point in the future, they may be regulated as security. And on top of that, the broker dealer was advised to develop an approved list of indexed annuities from which the registered reps could sell. Now this is a very big deal because at this time we had over 40 different insurance companies offering an excess of 250 different indexed annuities. But these BD’s were put in a position to develop this sometimes called short list of indexed annuities that they’d let their registered reps sell from.

And initially, they knew nothing about indexed annuities, so they came to us and said, “Can you put together an approved list for us?” And when I said sure what is your criteria? Their response was, well I don’t know. Whatever you think is best. And what’s best for me is not necessarily best for your clients. So they needed a set of criteria, and eventually what they came back to us with was using this 7010 Rule, or what they called 1010 Compliant, where the indexed annuity product must have a surrender charge of no more than 10 years and no greater than 10%. And of course they had some other nuances in there like most BD’s said we won’t allow the carrier to have anything less than A- rating. We won’t allow premium bonuses in excess of this, or commissions in excess of this.

So it really, really changed product development. Because before an insurance company might have said, “Yeah, you know, but we don’t sell too much through the state of Utah,” or “Maybe Rhode Island isn’t really a big state for us in terms of sales.” Now those companies were saying, “You know what? 55% of all of our contracted agents are registered reps, so they’re not going to be able to sell our 15-year indexed annuities anymore because they have to adhere to this Notice to Members of 550.” And that, my friends, is why product development in the fixed and indexed annuity markets has changed forever.

Now most of you are also familiar with some recent annuity regulation that we’ve seen. The Suitability and Annuity Transactions Model Act has recently been updated. If I recall, it’s the third iteration of the Annuity Suitability Model Act. And this most recent version is only different from the previous version in a couple of different ways. Number One: The insurance company has to do a second check on the suitability of the case, and licensed insurance agents have to take four hours of suitability CE’s on annuities.

Now I’ll tell you, as a licensed agent in the state of Iowa, we are getting some very specific CE requirements. In this state we have to take Ethics. We have to take LTCE. If you’re in the long-term care market, you have to take four hours of Annuity Suitability Continuing Ed. And if you’re selling indexed annuities, you have to take another course that’s specific to indexed life and annuities. Is this something that’s going to spread? Well absolutely. We have a majority of states now that have adopted this new version of the rule.

Basically, this is something that we brought up to say to FINRA, “Hey, you know what FINRA? Our suitability model is just as strong as yours, and so really in regards to SEC’s 151A, you have no basis for presuming that our regulation is not as strong as yours because it’s essentially the same.” And so we used this as kind of a way to ward off 151A, and when you take a look at the states that have either adopted this updated version, or have proposed the adoption of the version, it’s really a good majority of the states.

It does, however, take years to get any NEIC model law adopted, and there certainly are model laws that are on the book that are more than a decade old, and they still don’t have every state adopting that rule. So be aware that that’s something you’re probably going to hear about if you haven’t already. You’ll first know that it’s been passed because likely WealthVest will be telling you that in order to get a case issued you have to take a 4-hour Continuing Ed. course on Annuity Suitability.

So how has this affected product development? Well I’ll tell you. It’s affected it in a really big way. We just compiled second quarter sales last month on indexed annuities, and when I looked at all sales through all companies, almost 60% of index annuity sales for the second quarter of 2012 were in 10-year surrender charge products. That is astronomical. But the reason for that is that you have three parties to the annuity transaction; the insurance company who has to get their spread or their profit in the transaction; you have the insurance agent who has to get paid a fair commission for the sale; and you have the consumer who wants to receive a fair credited rate or, in the case of an indexed annuity, maybe a participation rate or cap.

I like to call it the three-legged stool of the annuity transaction. Well I will tell you with this 10-year surrender charge, and the preponderance to sell those longer term products, is because everybody’s trying to jam the most value they can to all three of those parties on the three-legged stool within the confines of the 7010 Rule. So give me the most commission, the most profit, the best rate that you can in that 10-year surrender charge. We’re seeing tons of new product development and hardly ever do the products exceed a 10-year surrender charge.

This has also affected the commissions on these products. You know interestingly, this is the number one objection I hear about these products when working with “journalists” such as WSJ or USA Today. They say, “Well aren’t these really high commission products?” No they’re not. You’re comparing apples to oranges if you’re comparing mutual funds to indexed annuities. But the interesting thing is that almost 76% of all indexed annuities pay 7% or less, street level commission, and when we looked at the most recent quarter sales, the average commission on the case is 6.52%. And in fact, it’s continued to decline each quarter for a few years now. But the average indexed annuity, when we talk about those sales statistics, has really changed over the past four years.

Matt was talking a little bit about attractive products and not having 8% bonuses available anymore. You know really, if you’ve been in the business awhile, you might psych yourself out because you say, “Well how can I sell this index annuity today? It only has a 5% premium bonus and you know four years ago I could sell a product with a bonus that was double that amount,” or “Is it even worth my time, because I’m getting paid more than 1% less commission than I was just four years ago to sell the product.”

And then for a lot of folks who’ve said, “Look, my sales have always been based on accumulation, and now I can’t do that because caps are more than 3-½% lower than they were a few years ago, so I’m going to sell on income. I’m going to focus on the income writer.” Well that’s become a tougher sale for these folks, too, because rollups have dropped by 2% on average, and yet the average annual fee for the income writer has nearly doubled over that period. So really before, where it seemed like an obvious choice for people who didn’t want to lose any money due to market fluctuation, now the index annuity is looking not so hot to us. And I mean to us who are familiar with those products four years ago, I’m going to tell you why we need to not psych ourselves out about that a little later here.

If you look at sales of this product, almost 9 out of 10 sales are coming through independent insurance agents. Certainly we have seen an increase in bank sales lately, but BD in career sales has always been pretty low. I will tell you that is something that is changing and changing rapidly. Matt also alluded to this at the beginning of our call. We have a ton of highly rated fixed-annuity companies, and even some that primarily focus on the VA side, that are essentially working on research and development for index annuities right now.

And when I say highly rated companies, very, very old; a lot of them east coast home offices. I’m saying there are companies that have spent years’ bad mouthing index annuities, and they’re now getting ready to launch their own products. Or companies that were in support of the SEC’s Rule 151A are now about to introduce an index annuity to their own distribution. And as a result, these companies who do not distribute through independent agents, are going to enter the market and increase sales for banks, career or captive systems, wire houses MBD’s. So those nontraditional distributions in this market are going to see a large increase in their market share of indexed annuity sales. I’ll give a little bit more support of that in a moment when we talk about sales.

So we talked about people selling on accumulations, and really that’s dangerous when it comes to Safe Money products because then when rates get to the point where they are now, you feel like you’ve been cut off at the knees and you can’t make your sale anymore. Because really, let’s take a look at fixed annuity sales. Back in ’08 you could sell fixed annuities that credited rates of almost 5-½% and it wasn’t too hard to do so. Today, the average fixed annuity is only crediting 1.98%. How can you make that value proposition when the person you’re trying to sell it to, remembers walking into their bank and seeing advertisements for CD’s that credited 4% just a few years ago?

Today the highest fixed annuity credited rate that we have available to us is 3.05%. Again, still lower than the minimum guarantees on some of the fixed annuity business you folks have sold in the past. And interestingly, the lowest fixed annuity rate that you have available today – 75 basis points, so less than 1%. It definitely is a challenging time.

Now when you’re talking about index annuity sales and how are people allocating their premiums because of the many choices of crediting methods, I’ll tell you, it really is consistent with the historical sales results. We’re seeing close to 40% of allocations go into annual point-to-point method. And that’s just because that is a crediting method that nearly every company offers. It tends to be the simplest crediting method that calculates and many companies don’t offer much other than an annual point-to-point.

But then you’re also going to see a huge allocation to the fixed bucket. And the reason for that is we have a lot of folks who like to make a sale where maybe the cap is only 3%, but if the product has a premium bonus of 10% and a fixed bucket credited rate of 2, they might be able to say to their clients, “I’ll guarantee you a first year deal, the 12. blah, blah, blah%. Would you be interested in that? And then what they do is reallocate the indexed premiums to different index buckets in years 2+.

The other thing we’ve seen, in terms of allocation on indexed annuities, is monthly point-to-point allocations have stepped up considerable over the past couple quarters. And that’s just because the options for monthly point-to-point methods tend to be most cost efficient or less expense during times of market volatility. So those caps then look more favorable during those times when we’re seeing a lot of ups and downs in the market. When you look at the indexes that people are allocating their indexed annuity premiums to, still by and large, the SMP 500 is dominating because it is a name that people know; they have brand awareness. But keep in mind, 20% of those premiums are going to the fixed bucket, and really when you look at alternative indices, the closet runner-up to the SMP 500 is what we call multi-index or rainbow crediting method. Outside of that, your closest choice is the Nasdaq 100, so a huge concentration towards the SMP 500.

Now in terms of marketing, this is the part where things get very interesting because you can’t sell on rate anymore. Although we do have index annuities with annual point-to-point caps as high as 7.15% today, we have tons of index annuities that have annual point-to-point caps of only 1%. And for those of you who are on the line saying, “Well I want to know who offers that 7.15% cap.” I’m going to tell you right now don’t call, don’t ask because ultimately I know you will not sell that product. It’s a relatively much lower commission as opposed to the products that have caps of 3%. But because people can’t sell on rate anymore, we’re seeing the discussion transition to accumulation. And that’s where I like to say GLWB’s have saved the day because guaranteed lifetime withdrawal benefits, although the rollups are declining, we still have rollups as high as 8% compound or 14% simple. And those credited amounts on the benefit base can accumulate anywhere from 7-20 years should the client decide to defer income.

Now keep in mind, the guaranteed lifetime withdrawal benefit, or what some people refer to as the income rider that value that the 8% compound interest is being credited on, is not available in cash surrender. We use the GLWB as an alternative to annuitization in this market, and those values are only available should the client turn on that lifetime income. And you know what? Election rates of GLWB have been really outstanding in the indexed annuity market. And they’ve always been above 50%. This is a benefit that was just introduced to our industry back in March of 2006, so very, very young in terms of product innovation.

And when we talk about it being an alternative to annuitization, what I mean by that is the number one value proposition of annuities is that it can guarantee an income that the purchaser can never outlive. That’s huge, but prior to 2006, we never talked about that in the fixed or indexed annuity market. Why? Well number one. You, the agent, lose control of the asset. Number two. Your client loses flexibility. And let’s keep it real; you’re maybe getting paid 3% street level commission at best in that transaction and you could get paid nothing at all. So there’s really no incentive to have that conversation about a guaranteed income your client can’t outlive. But now that we have the GLWB, your client maintains flexibility. They can stop and start payments or even change the payment amount. You retain control of the assets and you still get paid your average 6.25% street level commission.

So when we look at GLWB’s as an alternative to annuitization, let me really drive it home how this has solved the dilemma for us. The percentage of annuity owners that end up getting a guaranteed lifetime they cannot outlive through annuitization – anyone want to take a guess? 2%. 2%. How can it be that this is the most valuable feature of an annuity, yet only 2% of people are taking advantage of it? Now enter the GLWB and we can see that obviously this is working.

Annuitization is thousands of years old. In fact, the very first annuity was essentially an income annuity, but yet we only see 2% of people utilizing it. And the income rider is only six years old and nearly 7% of people have already turned on that lifetime income stream through the rider. I’d say we’re not doing too badly. Now the interesting thing is that normally we would expect to see people deferring taking that income because many of the income riders that are available today have an incentive for the policy holder to delay taking that lifetime income. And what I’m referring to here is the rollup, where the insurance company is saying, “We might credit 6% compound interest everyday on your income value should you not activate that income.” And they may offer it as long as 10 years or 20 years, so that’s an incentive to delay that retirement income stream. Yet we are typically seeing that income stream turned on in year 1.9 on the contract, and there are some income riders that are specifically designed to perform better when income is turned on in the first few years. And really that is somewhat skewing the data.

We are also seeing that there are agents that don’t understand that even though there’s a rollup on the contract, and that is fabulous and it might help them make the sale, it’s not something that their client is able to benefit from because they’re turning on income right away. So just be aware. That can be a suitability issue if you’re client is not getting the benefit of the rollup because they’re turning their income on very early, they’re paying for something that they did not receive a benefit from because there is a cost in the rider relative to the rollup.

So what other trends are we seeing right now because commissions are reducing and bonuses are dropping? What are some of the new trends that we’re seeing that are maybe less negative? Well we did see for a while a big uptick in enhanced death benefits being offered on these products. There were a couple companies that said, “Look, we’ll pay the income value out on death as long as the client takes out a 5-year payout at minimum.” We’ve really seen all of those different types of enhanced death benefits kind of go away, or product development has been put on hold, or product launches have been stopped because the treasury dropped down to, I want to say 1.4 – 1.37 back in June, and that really affects how attractive of a product the insurance company can afford to offer.

The other thing we’re seeing quite a bit of focus on is increasing income on GLWB riders where the client’s paycheck for life could go up based on the market’s performance, or it could go up maybe 3% every year. Those are getting some more visibility. And then some insurance companies have really been focusing lately on income riders, where typically the client would get 5% payments for the rest of their life, but if they qualify for 2 out of 6 activities of daily living, now they get 10% for life. Keep in mind those types of riders do not qualify for preferential tax treatment under the Pension Protection Act, but they are a nice tool if you have some clients who you believe may be having long-term care needs ahead of them. And good Lord who doesn’t have a need for long-term care type benefits right now?

Big bonuses on income rider’s benefits base values, or income values. You’ve seen these products. They’re the ones that are offering 15, 20, 25% and even as high as 45% bonuses on the income value as long as that income is turned on. And again, these bonuses are not available on cash surrender. We talked about the vesting and recapture charges on premium bonuses. I will say we are seeing a lot of companies experiment with new crediting methods. You all know I’m not a huge fan of this just because all crediting methods on all index annuities are priced to return the same over a long period of time. It somewhat complicates the sales process, but anytime we’re dealing with a low interest rate environment, you will see companies trying to provide some innovations through crediting methods because they think, “Well an annual point-to-point cap of 3% isn’t attractive, but maybe if I add an averaging method on there, my cap will be higher than 3.” Well sure it will because you’re taking highs and lows into consideration in that crediting calculation.

But what we’re seeing lately is all new crediting methods that maybe haven’t been offered on these products before, and that’s just a response to low interest rates. And I know not a lot of this sounded like warm fuzzy news, but I’ve got to tell you it’s a fabulous time to be selling indexed annuities, and especially when you consider the alternatives like CD’s and fixed annuities, which are the main products the index annuities compete against. And let me tell you, it is translating directly to fantastic sales in this market. Now for anybody who’s selling fixed and variable annuities, too, you’re going to say, “Well sure. Index annuity sales are just a drop in the bucket.” And when you compare it to sales of those products, it really is.

But keep in mind this is a product that’s only 17 years old; very immature in terms of the product life cycle. This is the perfect storm for increasing index annuity sales, and this is also where I’m going to refer you back to those big carriers that are getting ready to enter the market. Because when you look at variable annuity sales, and this is close to 10 year’s history of VA sales, you will notice that those sales tend to track up very, very closely with the performance of the SMP 500. See how that trend line is very similar to the performance of the index?

Well fixed annuities are very, very different. These products are essentially commoditized. And so where you’ll see sales going up and down, that’s a direct result of rates going up and down. And I will have folks that will say, “No Sheryl, that’s not true. I sell fixed annuities for this one company that has this unique rider.” Well great, but if there was this other product that didn’t have that rider, and the credited rate was .2% more than the annuity you’re selling, the clients going to pick the one that pays the .2% more.

So how does this have anything to do with new companies entering the market? Well historically there have been a lot of these big highly rated insurers that have said, “We sell fixed annuities and we sell variable annuities, but we don’t like index products.” And when the market was volatile, when we look at our SMP 500 graph here, they’d say, “Okay, well the market is on the rise, so our VA sales are on the rise, and our fixed annuity sales are declining.” But essentially what we are doing is passing off the money that’s in our left hand over to our right hand. Well then when fixed annuity rates would be really horrible, they’d say, “No big deal. Those people will buy our variable annuities because when interest rates are really low on fixed annuities, we typically see those assets shift to the variable annuity side of the house.”

Well what do you do if you’re an insurance company that sells fixed and variable annuities, but interest rates are at historic lows, and market volatility is pretty bad, and folks have seen two huge declines in their retirement accounts in just a one decade period? Well those assets are now flying out the door, instead of switching from the left hand to the right, and they’re going to companies that sell index annuities. And that’s really why we are seeing these companies getting into the market, where before they’ve maybe bad mouthed the product. Because they’re essentially being bullied into offering these products, and that is why we are going to see an increase in sales for those alternative distribution.

For maybe those of you who are not registered reps and saying, “Well I think it’s great that Morgan Stanley and Merrill Lynch are maybe considering offering index annuities on their platforms, but I’m not a registered rep. I feel threatened.” Well you shouldn’t. This isn’t something where you’re going to lose business to that rep. This is good news. It means we’re going to stop seeing so much negative attention on these products because really when these big Wall Street firms are selling index annuities, they’re still the advertisers of these journals and magazines that have bad mouthed index annuities in the past. But certainly if you’re that magazine, you’re not going to bad mouth a product that’s being offered by your number one advertiser. So that’s going to be of help.

The other thing is these firms are going to start advertising index annuities in magazines and even on TV. I actually did see a commercial recently talking about index products for the first time. And so if your client sees a commercial that talks about this product and even mentions it, you’re an interest based on the performance of the market, but you’ll never lose money as a result of the market’s changes. They’re going to come to you and say, “Hey, what’s this thing I saw about on TV. Can you tell me more about it?”

Now the number one indicator for index annuity sales is actually CD rates. And as you can see, they’ve never been worse, but that has directly translated to a huge increase in index annuity sales. In fact, there’s a direct inverse relationship between CD rates and index annuity sales. So when the journalists call me and ask for forecasting of what sales are going to be like for the next quarter, I just pull out my magic ball, which is bankrate.com, and that gives me a really good indication of where they’re headed.

So how does that translate to sales? Well pretty phenomenally. I’ll tell you that second quarter 2012 was our second largest quarter for index annuity sales ever. Yeah, that’s right. I said that. Despite the fact that bonuses are half of what they used to be, and your comp has dropped more than 1%, and caps are ½ of what they used to be, we had the second biggest quarter ever for indexed annuity sales in the second quarter.

I think this is going to be another record setting year for sales and in fact, we’re on track to do about 35 billion in indexed annuity sales in 2012. And really I have to thank all of you for that because I know all of the hard work is being done by you. You’re struggling and you’re working much harder than you did last year just to make the same amount of money, and yet you’re getting the story out to more people. You’re insuring that there aren’t going to be folks like me who lose almost half their retirement funds like I did back in 2000. So I really appreciate your hard work and all your efforts to get the story out.

And in terms of safe money, let me tell you why this is the best time to be offering indexed annuities despite the low rate. There are 53,000 Americans that are aged 100+ today. That’s huge. I remember when George Burns turned 100 and it was a big deal on the national news. It’s not such a big deal today. Because of our advancements in medicine, they’re making this a reality for many more people. There were only 23,300 people that were older than 100 back in 1950. So that’s been a huge increase and it’s only going to continue to go up. Time magazine discussed just in June that the first person to live to be 150 years old is already walking the earth today and within the next 20 years, we’ll be able to live forever because of our ability to grow any organ in a human body.

Healthcare costs are going up like crazy. I don’t know about all of you, but I actually pay in excess of $24,000 a year for healthcare for my three children, my husband, and myself. And it’s only projected to increase each year. When you couple those things with the recent loss of retiree’s nest eggs, it makes it a great time to be talking about fixed and indexed annuities. Recently I heard the Social Security Administration is considering increasing full retirement age to 70 or 80 just because people are living so long.

You’ve undoubtedly seen the stuff in the news about GM getting rid of their pensions for their employees. That’s not a new development. People are doubting the reliability of the social security system, and the number one fear of Americans is now outliving one’s retirement. What better time to be talking about indexed annuities? Sure this isn’t the product that you remember from four years ago, but you know what, the Obama legislation has been talking about annuities in the news. That means before where nobody had even heard the term annuity, now they are. They’re getting a positive annotation along with that word.

People are living longer. They’re concerned about funding a very long retirement, and the recent market declines have them asking for safe money products because of the guarantees that are offered in them. And at the forefront are definitely indexed annuities because when the market brought nearly 50% in 2008, the folks who owned indexed annuities were protected by a floor of 0%. So they didn’t lose any money over that one year period where folks who owned 401k’s and similar risk money products, lost a lot of money. And a lot of people think that zero is your hero is the best thing about indexed annuities. I would contend that it isn’t.

The annual reset feature is the number one feature that I like because where you might get zero when the market goes down, the really cool thing is the next one year period in 2009 to 2010 is a great example of this, where the market’s at its low point is your beginning for your next index measurement. And for those people who owned indexed annuities in ’09, I will tell you there are a lot of folks out there who earned index gains in the double digits. You have an awesome opportunity to cap out and get some phenomenal index gains when the market is recovering, particularly recovering over a steady long period of time. And that my friend is a fabulous value proposition.

No indexed annuity purchaser has ever lost a penny as a result of the market downturn; not one. That is a reason to be talking about these products right now, but definitely there is a potential to outperform other safe money products. So you need to quit psyching yourself out. We remember when fixed annuities were crediting rates of 8%, but your client likely doesn’t. It’s the guarantee these people want. If you’ve locked yourself into selling on accumulation, you’re doing your clients a disservice because it is the guarantee of these products that people are most interested in. So stop selling on rates; start selling on guarantees.

I’ll tell you I had a guy call the office two weeks ago and he said, “Sheryl, I’m looking for a product where I can guarantee that I’ll get at least 1%, maybe 2% interest. Is it true that I can get that with an indexed annuity?” You bet it is. You bet it is.

I think I want to turn it over to Dana now. She’s got some updates and I thank you all for your time. Dana.

Dana: Oh I’m sorry I was on mute. Sheryl, thank you so much for joining us. I’m going to ask you a couple of quick questions and then just make a brief announcement. Let’s see, Sheryl, over the last year sales have dropped in the BD channel. Do you have any insight as to why that might be?

Sheryl Moore: Well we have seen some companies that have been especially strong in that distribution, experience sales decline. I’m not going to name who those companies are right now, but I will say that their sales have been primarily alternatives to fixed annuities. And so when their rates declined, that led to lower sales for those companies. We are going to see an increase in that distribution, however.

Dana: Awesome. I often have agents ask me what they should tell their clients to do as far as allocating. Which allocating index options should they be recommending, and can agents legally recommend one, or should they not?

Sheryl Moore: Well this isn’t really an issue of legality. What crediting method, what index is best? As I always tell our agents, there is no one crediting method that’s better than another. And all indexed annuities, regardless of crediting method, index, or whether the company is using a cap participation rate, or spread-to-limit interest, they’re all designed to perform the same over a long period of time. And that’s just one to two percent more interest than fixed annuities are crediting them on the day the policy’s issued.

Now that being said, personally I allocate a little bit to the fixed bucket always, always because especially if you have rider fees in there, you don’t want to see a negative on their annual statement. But on my own policies, I put the rest equally among the other indexed allocations because certainly they’re all priced to return the same over a long period of time. But in any one certain year, one crediting method can outperform another.

So maybe one year I’ll increase my allocations to a monthly point-to-point because I see that the market’s at a low point. Or I may allocate to annual point-to-point because I am seeing a lot of volatility. But personally I’ve just said it and forget it because this isn’t a product you should have to actively manage. So whatever’s most comfortable to you, and I think whatever’s simplest for your client to understand, is the right method for allocation.

Dana: Okay a couple more, Sheryl, and then an announcement. Do you recommend that the client first drop the income rider then second, annuitize the account as to avoid income rider costs?

Sheryl Moore: Well there are a lot of insurance companies that will not permit you to terminate the income rider once it’s been elected. I basically look at this as a choice. Choice A is choose the income rider. Choice B is don’t choose the income rider and annuitize. But if you discuss annuitization of the [0:51:49.4] income rider, you need to make sure your client understands there is a lack of flexibility, and should they have an unexpected circumstance, it’s a very structured payout that they cannot change. And if they’re okay with paying a little extra and getting a lesser payment to retain that flexibility, that’s when the income rider is more appropriate.

Dana: And then the final question and then the sun bit here, Sheryl, do you first see New York ever becoming more annuity-friendly?

Sheryl Moore: Oh absolutely not. New York is just not life insurance- friendly at all. As everybody who’s ever done business in New York is aware, they have stricter regulations than all the other states do in terms of life insurance and annuity products. I don’t think that will ever change unless you get some large trade organizations in the insurance industry pushing back and getting consumer support of that. And having been very highly involved in SEC’s 151A, I’ll just tell you that resources for that endeavor are very, very small right now. We likely will not ever see that.

Dana: So thank you so much for answering those questions. We have a sun announcement as many of you know, Sheryl is the annuity rock star, and she’s known for her sparkly check tailored Converse sneakers, so sell a point with WealthVest today, September 12th, with a key carrier, and you’ll receive a pair of checked tailor Converse sneakers autographed by Sheryl, and that will be with sparkles or without. That’s your choice today, so be sure to let us know your shoe size and what you prefer. So again, thank you Sheryl. Matt I don’t know if you’re still on. If you’d like to just sort of wrap up quickly and we’ll say thank you.

Sheryl Moore: Yeah. Thanks Dana.

Matt: You know I would…

Dana: Go ahead Matt.

Matt: And I would. I want to quickly share two techniques that are being used by our top producers to close business in this marketplace and I think they’ll be helpful for you. You can break them into two categories: The CD alternative and the market alternative. From a CD alternative perspective, our best advisors are sitting down with clients and asking one question. Tell me about your CD’s? They’re not asking do you own CD’s or what you think about CD’s. They’re asking tell me about your CD’s. You’ll learn a lot about a client’s psychology as it relates to investment by asking that one question.

The next follow-up question you ask is, “Do you feel you are receiving a fair rate of return on your CD investment?” That two question combo has opened up more fixed indexed annuity sales for these individuals than anybody else. You get them talking about the fact that they are making a value judgment whether it’s fair. We know the answer to that is no, and it makes a wonderful way to begin talking about alternatives once you’ve made that statement.

The other one for a market alternative our advisors are saying, “Hey listen, the market has recovered to where it was back in 2008 and not coincidentally where it was the last two times it crashed previously. Let me ask you a question. How would you feel if you were to lose,” and put in a number you feel comfortable with, “10%, 20%, 30% if the market were to go down.” Sit back and listen.

And I got this idea from a great producer of ours. He uses the statement as a follow up there. “Insurance is about the transference of risk, and we’ve been doing it through our entire lives. We use auto insurance to mitigate the risk of accident. We use home insurance to mitigate the risk of disaster. We use life insurance to mitigate the risk of living day to day, and we use portfolio insurance to mitigate the market risk of your portfolio.” Let’s transfer your market risk to an insurance company. And we’ve had great success with both of those options depending on what type of client you’re talking to.

The number at WealthVest is 877-595-9325. If we can help you in any way do more business, close more business, or get in front of prospects, we’d love to hear from you. Very much appreciate the time you took today. Thank you very much and we’ll talk to you next time.