Interest Crediting Index Strategies | 7 Figure Annuity Sales Podcast | Ep. 296

Higher rates because of index fees and higher rates on two year point to points do not always equate to more money at the end of the term. Welcome back to the seven figure Annuity Sales podcast. It's Caleb north here. Today I'm going to be going over something that is pretty near and dear to my heart. Interest crediting index strategies. You guys know I love that kind of stuff. I love talking about it, I love training on it and I want to talk about something that just frankly insurance companies and IMO marketers don't talk about all that often. And truth be told, I not necessarily sure that they spend a whole lot of time thinking about the cost of higher rates because the truth of the matter is anytime you're increasing the index rate on a particular strategy, there is a cost to it. Right? So let's just talk pragmatically here. If you, if you have a product that in this rate environment, let's just say has a 10% cap on the annual point to point version of the s and P500. Okay? So it's a one year crediting period, annual point to point, just a standard old cap, nothing crazy, nothing fancy. Okay, well if that's your standard annual cap rate, then if you want to get more rate than just the free plain jane vanilla version of that index crediting method you have, there's a cost to it. You have to give up something in some way, shape or form. And the way that insurance companies have typically designed that is by adding a fee to the crediting method. You guys have probably seen that before where you've got an index strategy that's got a 1% annual fee on the strategy to quote unquote, buy up the rates. So now you've got a higher index rate or what they'll do is they'll elongate the term, right? So it might be instead of an annual point to point, now you're dealing with a two year point to point in a two year reset. So now you're dealing with two year crediting or some have gotten real creative and gone to three, five I've seen. So it's all, it's all a marketing thing, right? If at the end of the day people are looking at, I mean, and you guys have probably seen this when you get a client or a lead come through and the lead says, oh I want to see the highest rate, show me the highest rates. And well, don't even get me started on what rates could mean. There's about five different things that the term rates could be referring to in our products. But it's fair to assume that most of the time what they're concerned about is crediting, right? So it's fair to assume that most of the time, of course, we're going to ask questions and figure out what they're actually looking for. But it's fair to assume that most of the time what they're referring to in that situation is interest rates, right? The actual rates on the index strategies that they're going to be able to get, which is going to impact the crediting that they're going to be able to receive. So from a marketing perspective, if you're an insurance company or you're an IMO trying to recruit agents, logically it makes a lot of sense to figure out ways to increase those rates because if clients are looking for it, then that means that agents who are trying to sell what their clients are looking for are going to be looking for it. So the next thing you know, you've got agents knocking down the door of whatever insurance company's offering the highest rate or whatever marketing organization is able to send out recruiting emails to their agent lists to, to try and recruit agents on the basis of some new product with these crazy rates. And the reality, guys, is there is a cost to it. And I'm here to tell you that the cost does not. The cost to have a higher rate than just the plain Jane vanilla annual point to point version of that strategy that's free does not always equate to more dollars at the end. In fact, when you look at the numbers, it often leads to less dollars at the end. And I've done the math and my intention here on this one today is to actually screen share. And so certainly if you're listening to the podcast, you can find the YouTube, it's on the annuity sales coach, you can watch the video and you can see these charts that I'm showing. But I am going to do my best to also articulate what's actually on these charts.

So that you can, you can hopefully track with us a little bit. But I do want to invite you to go watch that video so that you can see these. I will screen share right now.

And we're going to break this down. So I had an agent reach out and ask me about fees specifically. Right? And it was, it was a, about what we talk about, right? Just like this fee, if I, if I use this strategy with this fee, it looks, it looks better, right? Well, sometimes it does. And so for those of you that are watching and those of you that are listening, what I've done is I've taken the annual returns, okay, from January 1st through January 1st of the S P 500, from 2014 to 2023. So a time period, a decade there, that's a 10 year stretch. So there's, there's 10 years of crediting because on this one we're looking at annual point to points. That's a, Most people would agree, that is a good run in the market. Most people would agree that was a good decade. And if you look at the numbers, it really was, it was a very lucrative, very bullish decade there. And as you probably already know, we've got, obviously in any period of time, there's going to be some negative years. So we're mostly positive. We've got seven positive returning years and we've got three negatives. And if you look at that, you know, just a 10% cap with no fee. If you were to start with 100,000 going into 2014 and you just, that cap rate were to hold for the whole period of time, you would have come out of 2023 with about 194,000. Okay. In your, in your account, if you had a 13% cap with a fee, you would have come out of 2023 with about 203. So about a $7,000 difference there going, getting that extra 3% cap or on the cap, right? Going from a 10% cap to a 13% cap, getting that extra 3% in the cap rate even with a 1% fee coming out. And if you look at the numbers throughout that decade, about half the time, exactly five years, the 13% cap with a fee had a larger value, account value. And throughout that time period, five of the 10 years, the 10% cap with no fee had the larger value. So obviously, if we're looking at a 10 year indexed annuity, hopefully they're not surrendering. But you can make a very logical argument here that if they had to surrender, there's a period of time there, a threshold of time where they actually would have ended up with, with more money in their 10% cap with a no fee than their 13% cap with a fee. Now the logical next question is, well, if that was a good 10 year period, what happens in a less enjoyable 10 year period? So I looked from 2000 to 2009, just a new decade, right? And most people would agree that of the decades that we've had in the stock market, that wasn't necessarily a great one. You had some positive years, but you had starting out three negative years in a row in 2000, 2001, 2002 and then obviously 2008 was, was in that time stretch as well. So when you look at the numbers on this one, what you see is the 10% cap with no fee actually being money ahead every single year all the way through. And it rounds out that 10 year period with 154, almost $155,000 in that account value, starting with 100,000, so 55,000 more approximately than where they started. The 13% cap with a fee would have ended up at about 151, almost 152. So you're talking about 3 to $4,000 difference, about $3,000 difference on a less favorable 10 year run. And so my argument here is in one instance we have marginally more money at the end when you buy up the rate in this example. And then in a less favorable 10 year run you end up with less money in the bought up rate, if that. Again, the assumption here guys, is that the rates would hold and the fee would stay the same, that the fee never goes up and the rates never go down. So assuming that happens, you can find a 10 year period that shows a 10% cap, just the standard cap rate, the plain Jane vanilla cap with no fee, annual, point to point, beating the bought up option. And so my argument here is not to say that bought up rates aren't good because again, we can look at a 10 year period where the bought up rate, assuming the rate holds and the fee doesn't increase.

We can show a 10 year period where it would have won, it would have actually been money ahead. So it's not to say that one is inherently better than the other, it's to say exactly that that one is not inherently better than the other. So when you're trying to assess index crediting and you're trying to assess allocation mix and all those kinds of things that you're doing with your indexed annuities and your clients don't necessarily be moved by a higher rate just because it has a fee or don't be moved by the opportunity for what we, what we coin more upside potential. Right, by having a higher rate if it has a fee. So that's my, my sheer argument here guys, is just that just because it has a higher rate does not actually mean more money in the end. So much of it is going to come down to the sequence in the crediting, the, the returns that actually take place. And as soon as you can show one 10 year period that looks extremely favorable For a strategy, you can find another 10 year period that is extremely not favorable for that exact same strategy. So that's, that's all I'm saying. I do want to talk also about two year point to points because this is another way that carriers and carriers will try and increase the marketable rates, right? It's like, oh, we've got a, we've got a cap of 16% on the S&P 500. Say, well, okay, that might be on a two year point to point or we've got a, we've got a 300% participation rate on this volatility controlled index. And it's like, whoa, 300%. You know, it's crazy how easy it is to be moved by rates that at the end of the day may not actually equate to more dollars in the account, which is what we should be the most concerned with, right? We should be less concerned with the rate, less concerned with bonus, less concerned all these things and more concerned with what actually equates to more dollars. Which for my clients, and if you were to look at these numbers again, we'll take the same 2014-2023 year stretch there. Your annual point to point with a 10% cap beats a two year point to point with a 16% cap. And mind you, the difference on that, okay, is a 60% increase in the rate, which is pretty stinking good. If you look at participation rates as a strategy or as a credit method instead of caps, a 60% difference between your annual and your two year point to point is gargantuously high. If you look at volatility controlled indexes that have one year and two year point to points, a 60% difference is exceptionally high. So to show, you know, a 10% cap on an annual point to point and a 16% cap on a two year point to point, that's giving that two year cap plenty of opportunity to actually do what it's supposed to do. The trick with the two year strategy guys, is that you have to make up for half as many opportunities to compound interest, okay? And when we've determined, and I've talked about this before, that over the time period that the annuity is in place, whatever strategy, and this actually transcends annuities, this goes into any investment at all, any kind of vehicle or anything that's crediting interest, whatever strategy or vehicle has the highest annualized return, which is essentially just a compounded annual rate of return. If you were to calculate one percentage that compounded on itself every single year, year over Year from start to finish, what would that rate equate to? And whatever that rate, wherever that rate is highest, that's where you would end up with the most money.

It's not the average. Okay, if you go and you look at a 15, 20, 10 year, 5 year run, it doesn't matter what the time period is, and you average those returns, that's going to mislead you because the average actually does not determine where an account value ends up. You can have one account that has a higher average than another account and it end up lower dollar wise if it has a lower annualized return. The annualized return is everything. So when we look at this, and again, if you're, if you're just listening to the podcast, you're just trying to track with me verbally here, but the 10, their 10% cap on the annual point to point that creates over the 2014-2023 a 6.85% annualized return. The two year point to point with a 16% cap is a 5.54% annualized return. Again, not average annualized. That's the effective compounded annual rate.

And the difference monetarily starting with 100,000 is going from 100,000 to 194 in the 10% cap annual point to point and 100,000 to 171.

In the two year point to point with a 16% cap. So a very stark difference. There's actually only one year where in this particular stretch of time where the 16% cap would have had a higher value. I mean it was about, it would have been three crediting periods in. So actually six years, three crediting periods for the two year point to point and it credited 16% twice and 9.86% once. So that was the only time frame, the only year over that entire 10 year stretch where a two year point to point with a 16% cap actually had a higher dollar value. And then every, every year thereafter, the annual point to point wins and actually reached the end of the 10 year surrender term with what would that be? $23,000 more than the 2 year point to point with a cap. So there's that don't be moved by rates. Now you say, well okay, that's looking at 2014 to 2023. On the last example we looked at 2000 to 2009. Let's do that again. Well, here we go. Annual point to point with a 10% cap goes from 100,000 to 150, almost 5,000. The two year point to point with a 16% cap goes from 100,000 To 131. So again about a $23,000 difference there. The annualized return on the 10% cap annual point to point was 4.46 and the annualized return in the two year point to point with a sixteen percent cap is 2.8. Oh.

So I started this podcast off by saying that just because you have a higher rate on an index, that doesn't mean that it necessarily will outperform or out credit an alternative. If the cost to get that higher rate isn't made up for and then surpassed with a two year point to point, you can get a better rate. But you're getting half as many opportunities to compound the interest, half as many opportunities to credit interest. So you need to not just double the credit, you also have to make up the compounded loss. So you're crediting.

Essentially one to two, half as many times in a two year point to point. So even if you ended up with the same percentages, you may not necessarily, because you've had half as many opportunities to compound, you may not necessarily end up with the same dollar value. And then with the fee guys, when you, if you have a year or two or a period of time where you're in a fee based strategy and you're not crediting, so now you end up with a zero, but it's not really a zero because you still have the. Maybe it's a 1% fee or 1.5 or I've seen 3% fees before on crediting methods, whatever that is. Now you're climbing out of a hole from an account value perspective. So to try to get back up you have to not only make up the fee once from the year that you lost it, but now you have to make it up a second time because it's still coming out in that following year. So my argument here is don't just look at the rate that you get as a result of going with a longer crediting period, a two year, a three year, a five year point to point four, you know, reset, whatever you want to call it, don't be moved necessarily by a higher rate as a result of a fee. You have to think about the cost and what that cost can equate to dollar wise and what the implications of that cost are from a crediting perspective and a dollar perspective. And when you run the numbers and you look at the numbers, it's pretty easy to say that in. Well, I mean if you look at, we looked at four examples here and four of these examples three out of these four the Plain Jane vanilla annual point to point cap with fee beat what we were comparing it to. A higher rate based on a fee and a higher rate based on a two year point to point reset period.

75% of the of these examples I guess you could say. And sure, I mean this is Small sample size 4 is not that much. But I think that the numbers that you see here, it should definitely raise eyebrows and it should definitely pique interest around.

Am I simply crediting or allocating to strategies on the basis of what the rate is regardless of the cost to have that rate? Or do I actually understand why I'm using the strategy that I'm using right? If I'm going to allocate to a strategy that has a fee, have I looked at the numbers to determine that relative to the other options available in that product, it actually is the more favorable approach? Or if I'm crediting to a two year point to point as opposed to an annual point to point just because I'm getting a better rate, have I actually looked at the numbers to determine that it truly leads to more upside potential than the counterparts, the other opportunities or the other crediting methods that are available in the product. So I'm sure that this was probably a little bit challenging for some of you to track with just verbally. I apologize for that. I did do my best to try and articulate what was being displayed on these charts as best as possible, but I would certainly highly recommend you go to the annuity sales coach YouTube channel and check out the video, the recording so that you can actually see these charts as I'm describing it. So hope you're well, hope business is going well for you this year. Reach out to us if you need anything, if there's anything we can do for you, or if you have any questions about this. And as always, happy selling.

Sam.