People about ten years from retirement may be interested in the hybrid annuity, suggests a report by the Financial Planning Association. These people may hesitate to buy long-term care insurance, but they are open-minded about investing in a product that combines an annuity with a long-term care policy.
The report cites several reasons: "They don't want to think about long-term care, they figure they can self-insure, they hate the idea of paying premiums when they may never need the coverage, and they worry about possible future increases in their [long-term care] premiums that they couldn't afford."
But Lance Wallach, a Plainview, N.Y.-based financial planner and author of the "CPA's Guide to Life Insurance" (a Bisk Education self-study course), stresses that stand-alone long-term care policies offer better benefit options than a combination policy. The stand-alone policy has features designed to reduce consumer worries about premium increases. In addition, policy premiums may be tax-deductible. Policyholders can also get coverage for longer than just a few years, and the coverage may be indexed to inflation. And there is a return-of-premium rider for those worried they may never activate the benefits.
"I would not recommend any annuity," Wallach says. "Interest rates are too low. People are better off with a long-term care policy and making no-load investments."
Individuals who invest in CDs and high-grade bonds are also putting money in index annuities. Index annuities may pay a portion of the gain on the return of a market index.
Investors put over $15 billion in index annuities, a 16% increase for the year that ended in June. Sheryl Moore, the publisher of AnnuitySpecs, says the reason is that their interest is linked to market performance. Returns are limited, so the insurance company can provide a minimum guarantee on the contract. These annuities are priced to return about 1% to 2% more interest than a fixed annuity. Plus, the index annuities offer a guaranteed 0% floor in addition to a minimum guaranteed surrender value that kicks in when the client cashes out or if the market value of the investment does not perform. At this writing, the minimum guaranteed surrender value offered about 1% to 3% interest on no less than 87.5% of the premiums paid into the contract.
Thomas Brueckner, the president and CEO of Senior Financial Resources, Nashua, N.H., says he invests exclusively in index annuities. Today, Brueckner says, fixed index annuities may have as many as seven different market indices to choose from-not just the S&P 500-in any combination. He can also reallocate or change that mix annually.
"There are now at least three different interest-crediting strategies to employ across those indices, and varying terms, some of which include up-front premium bonuses of 5%, 6%, 10% and even 11%. Bonus products require longer terms, of course, but have been especially popular with retirees fleeing risk-depleted holdings for the stability, guarantees and safety of [fixed index annuities]."
Advisors investing client money in index annuities could be on the right track. Over the past five years, index annuities have served conservative investors well. Over the past five years ended in February 2011, index annuities with a point-to-point annual reset interest crediting method gained a total of 64%, according to Advantage Compendium, a St. Louis-based research company. By contrast, the S&P 500 has grown only 1%.
Brueckner says some of his retirement clients have activated the guaranteed lifetime withdrawal benefits on their index annuities in IRA rollover accounts. Others take advantage of contract rules that let them withdraw 10% or less of their principal annually without paying surrender charges. Some clients let their money grow so they can roll over the account at maturity into another annuity, which pays a premium bonus. And several use split-funding for income and growth.
"Fixed index annuities are not designed to outearn long-term bull markets," Brueckner says. Instead, they capture some of an index's advance. In exchange, they never lose their past interest credits if the market collapses.