Selecting Index Strategies And Renewal Rates | 7 Figure Annuity Sales Podcast | Ep. 167

Today we're going to talk about index strategies, renewal rates, what to look for and what to avoid.

Hey, everyone. Welcome back to this week's podcast. I am Chad Owen. I'm not even going to tell you. The Annuity Sales coach, owner of Retirement.

Realized Financial and Retirement Realized Agents Academy.

There you go. Dubbed in.

And I am. You're.

Yeah. What are you today?

Who am I today?

We don't even have a name for him. We don't speak it.

I'm trying to think of some. Something good. I can't. I'm trying to get past the Boy Wonder. Although maybe I'll just. Maybe I'll just brand myself as that in the industry.

We're gonna do this big old sign in the front of our building that's going to say Boy Wonder.

Okay.

Okay.

With my photo.

Sure.

You're gonna have people coming from far and wide to see that.

Now that you've grown your beard in, that might work.

Oh, man. All right, index strategies and renewal rates. What to look for and what to avoid. What are your. I mean, just right off the top, Chad, what's your take?

So indexes are one of those funny little creatures. You know, we used to, when I got into the business, was real big into the S and P, the Dow, the nasdaq. There's a lot of annuities that use those strategies based off of the brats. And I call them the brats because they throw a fit and then they're happy. They throw a fit and then they're happy. I mean, the brats, they just. Their temper tantrum is a 50% loss in the market, but they're very temperamental based off of news. So often you'll see news stories come out at 12:01am and then you'll see the market get hit that way. And whether it's for or against. And it's funny, I'm. I'm convinced now. This is not a conspiracy theory. This is just something I've observed that it's interesting how news comes out 12:01, 12:02, 12:03am Negative, and then the market hits bad. Now you can say, well, they're just reporting what's going on. It's funny because some of the stories they report about hadn't even happened yet. I remember this one where they're talking about banks having an issue and they named something very specific. And there was no way in that time zone where it was announced that it could have possibly even happened yet. And then where. Where it actually happened in. Because obviously, you know, you go forward. I've done a lot of traveling. I mean it can be a day ahead in another country. But I did the ma, I did the time calculation. I'm going, when you announce that happened three hours later from the time our time zone in the new time zone, three hours after that is when it actually happened. I'm like going, you know, weird. Can you get insider news? Absolutely. But it's too common. Stuff like that happens. So the, the Dow, the Nasdaq and the, and the S and P, those are just very temperamental indices. I tend to like some of these volatility control indexes. I like annual point to points a lot. A two year point to point can be appropriate and the right situation as long as you do the stagger the 50% in the one year, then the 50% two year and then the next year you turn the 50% one year into two year, then you have the staggering returns. Every two years you have one of them crediting. And the reason why that can be advantageous because you have a higher participation rate when you do that. That being said, I'm still pretty big fan of one year point to points. If I can get a one year point to point with a good historical off of it, that's what I'm generally going to use. I also don't like indices that have a built in fee. I just don't. You know, we try as indexed annuity people, fixed annuity people to get away from the perception of high fees.

Right.

So if you have a one and a quarter percent fee on the indices and you have a one percent fee on the rider, now you're paying two and a quarter and you're trying to explain why their 3% fee on a variable annuity is too high.

Right.

So I don't like indexes that have fees on top of that. And then the other thing, I don't really care for indices that have two limiting factors. So if you have a cap and a spread, I don't like that. If you have a participation rate in a spread. That being said, there are some I have used. It just depends on the company and the rate integrity. So I'm real big into learning the rate integrity of companies. How many companies have I seen over the past 17 years that they tell you it's one rate, then when you go to the next year renewal it drops dramatically. And so there's a handful of companies out there that have a high rate integrity. And if you don't know what those companies are and you want to get contracted with is you can absolutely do that. But I'll tell you, companies high rate integrity will keep a lot of issues in the future from happening. You have clients that don't get ticked off because their 70% participation rate dropped to 40%. I personally have never carried a company that's done that, but I have seen companies that have done that, they fix their implied volume. Oh my gosh.

Well, there's whole formulas that go in and it's, I, I could nerd out on that stuff. I won't nerd out. I'll save them. I'll save them that for when they.

Call you and ask for information. Then you can nerd out. But remember, you have a limited time.

I got a limited time. But there's a reason that the S P historically has lower participation rates and a lot of times they use caps on that index. And the reason that they're lower par rates and caps is because that is the S and P, the Nasdaq, all of those that you call brats. It's more expensive, to put it in layman's terms, it's more expensive to hedge against those indices than volatility control indexes. So that's why you see higher par rates, higher caps, lower spreads on volume control.

It's also more expensive too when you have a shorter time frame than a longer time frame. So when you have a one year point to point, that's more expensive for them to do than a five year point.

You benefit from the reset because you.

Get to start do three and five year. I'm, I'm, I just had to replace an annuity from someone that I wrote six years ago and he was on this second three year time frame and fortunately this last third three year did pretty well for him. But I don't think the next three years are going to be that because the MBA, it's the first annuity I've ever replaced in 17 years. That was my own annuity that I wrote. So in other words, I, there's a guy in my area that sends out letters to his clients saying hey, you bought this annuity from me four years ago and I think it's time to replace it. And he uses the bonus to outweigh the surrender value. But what he doesn't take into consideration or he doesn't, he doesn't care. The income of account value is already super high and I hate that. Like I am turning them into the insurance commissioner. I'm waiting to deliver this policy and this client actually has the letters where he's showing that I've seen two clients with that, seen three. The one won't give me the letters, but the other two will. And so I'm going to turn them in. And it's the first time I've ever replaced an annuity that I personally written. And the reason why is because when I do that, I'm confident in what I'm putting them into.

Right.

But because the mva, the surrender value is actually completely wiped out, which is really nice. There was no surrender charge in this. If there was a surrender charge, I wouldn't have done it. Yep.

So yeah, there you go. So, yeah, renewal rates obviously very important. Some companies publish them, others don't. But if you can find that rate history for whatever carrier you like or have been selling, you can go back and you can check to see what do their renewals. And if you've been in for a while, you, you'll have come across the renewals, the statements, the reallocation, whatever you want to call it, those annual two year, whatever it looks like when that reset is up and you go to reallocate, you'll see what their new rates look like. And so you'll have a pretty good idea of what companies out there do have good rate integrity and who doesn't. But if you're new, you can look for published renewals.

The other thing, there's one company that I've written that I really regretted. Fortunately I only wrote like 8 Paul. Sure, they had a 5 year point to point and I'm telling you, the way they explained it, it was towards the beginning of my career and the way they explained it sounded like peaches and cream, man. It sounded like there's no way they could lose. And I had a client go five years earning nothing even when the market did go up. And it was really frustrating because I mean I did, I did my due diligence, I studied the product, I spread a studied the, the disclosures and what they said happened didn't even close to happen. So it's frustrating.

Well, the carriers. So when you go back and you look at historically you've got, you know, back in the day, S and P, nasdaq, those, those high volatility type of brats. Yeah, the brats. And then the insurance companies started getting creative with their vault control now index. I'm sorry, now insurance companies are getting creative with the way that they reset. So they're reset, period. Okay. And then the, the way that they index those. Right. The way that they actually, and I'm trying for the life of Me cannot think of the name.

That's okay. I would just rather leave it at that. That way we don't have to keep hearing you talk.

It's a specific word and I can't. But I can tell you close to.

That nerd nerding out moment and it's like so yeah, it's okay, kid, what are we talking about next?

Right there. I cannot think of it.

Think of a nice 10 point buck walking out to deer feeder.

That's just distracting.

I know, that's what I'm saying now. You'll never remember it.

Yeah, golly.

I'm going to think of it. When I do think of it, I'm going to come back and I'm going.

To say it gently. Eating the corn, not moving.

All right, well let's, let's do move on then to the next one.

Win for me. Thank you.

Carrier illustrations.

Yes.

God bless these insurance companies that have 10 years of phenomenal market performance. So when they have to show on their illustrations last 10 years whether that's back tested or live data from the index, regardless, they all, they look amazing. You see best of, you know, some of these carriers are showing 9, 10, 11, 12%.

They can. But there's also some like I use one right now that actually has shown just barely under a 6% return over the past 10 years. And its best 10 years was not the last 10 years because it's a volatility control index. So that being said, you know, I like Texas where they and a lot of states do this too. But you have to show the best 10 years, the last 10 years and the worst 10 years and they go back anywhere from 20 to 30 years and 10 year increments. And I like it when they do that. But you know, I think I get where you're getting. You got to be careful.

Talk about realistic.

Yeah, realistic terms. I mean if somebody's telling me they have a 14% 10 year return, I'm very skeptical of that happening again. I'm not saying that that didn't happen. Sure. Just saying of it happening again. Yeah, like, you know, I've told you this, you and I have talked about this many, many times. If somebody tells me the best for a 10 year return of 14% and your worst 10 year return is 2%, that's too great of a spread.

Right. So here's the thing with those that show that you're not going to find any index strategy, allocation strategy, whatever you want to call it, that's based on what you call the brats. These Long lasting, lots of history indices. They're almost always with volatility control indexes, most of which are not even five years old.

That's true.

So so much of what they're showing when they're showing you 9, 10, 11, 12% or more on average over the last 10 years, you're looking at a lot of backtested data which great. The back testing process is awesome.

That number, those numbers are real. If it did exist, that's what would.

Have, that's what it would have done. But it's also taking into account current insurance company rates and the reset options.

I mean if I was a stockbroker and I went back 20 years ago, I would be a billionaire. No, hands down right now. I mean I would just bought some crypto at the right time. I would have bought, I actually would have probably bought Hindsight 2020, Apple, Microsoft, Amazon and then when Bitcoin first started I would have just loaded on that and I would be a kajillionaire now.

Yeah, hindsight's 20 20. But that's what I'm saying is it's taking into thing, it's taking into account things that it either wasn't around for, which again yes, the back testing is great data or to the current rates. So if you have a carrier that is showing you 9, 10, 11, 12% returns over the last 10 years and let's just say for the sake of this example that they're using 150% par rate on that index strategy.

Yeah, but in all fairness, so I know where you're going with this, but in all fairness we got to know that it is still based off of the 10 year treasury as you know and the illustration rates are based off of what that current rate is. So I remember there was a time where I saw a company, they had 115% participation rate where that same company now has a 90% participation rate.

That's what I'm saying.

Yeah.

So if they assume that, oh yeah, if this index was around 10 years ago and had performed over this 10 years, this is what the index would have done based on our super high participation rate. But we don't have good rate integrity. That's a, that's an inflated number that you won't expect to repeat itself because you can be sure that they're likely to drop their rates if they don't have good rate integrity, in which case it drastically affects the actual return.

It is so important. I'm going to stress this again because this is a really important and to Remember, always use companies that have high rate integrity and always question a company that doesn't publish renewal rates. If you can't call your company and say, hey, I want to get an illustration. I want to see what your participation or your caps were for the past 10 years. If you can't get that, that's, that's a concern to me.

I thought of the word that I was trying to think of a little bit ago. Crediting method. My goodness, who would have thought that? Well, the thing was like I know it, I say it all the time. I know it's not a hard, but it was like buried in my brain. But they're, they're, they're starting to get creative with their crediting methods. Carriers are coming out with their own proprietary types of credit, new ways of crediting all these types of things and then mixing that with their reset periods. It, they're starting to create a lot of differentiation on those two fronts, reset period and crediting method. And some of which you need to.

Really dig into some. You got it. You got to be very aware. Is this a marketing.

Kind of.

Most of the time it is.

Or is it someone being innovative with what's going on and that's where you really have to look at the company you're dealing with.

Yeah.

You know, pure market innovation. I mean you could go back before the index annuity started and I'm sure you could have someone going, yeah, this is a scam, this is a ploy. Something's going on. This index strategy is these indexed annuities are a bunch of bull. You want to know why I know that? Because when the income rider first came out, it took me a year to get into the income rider and now I am an income rider junkie. Oh yeah, why? Because vast and I don't know about you all, you may get clients that have more than enough income and they never have anything to worry about. That is not my client base, my client basis. One of the spouses passes away, they are in trouble. And if they don't have joint lifetime income, they are in trouble. And if one passes away and loses the lower the two Social Security, that surviving spouse is going to need income. So I mean, like I said, I think it's funny because a lot of people have this perception that I'm in this super high end area where I have people that much upon millions of dollars that I show up to the house and they got all their statements laid out and they're like, please Master Chad, help us. I was like, no, it is not that case, man. I've had big deal. I just had a big deal. I had a two million dollar deal that I wrote and they backed out on it. Fortunately, it was not issued, the money wasn't transferred. But I still don't know what happened. Yeah, everything went perfectly in that appointment. I met with him three times. Then they said, you know what? When you get back, let's meet again. I'm not ready to actually sign any checks yet. I'm like, no problem, no big deal. And there's so much bad information. I don't. Yeah. And it could be something that simple. They could have talked to one person having an opinion and they just changed their mind. I don't know.

I mean, the influences out there, we don't even know the half of the things that are. And the people that are influencing clients that you're meeting with.

But that's why I tell people, do not get emotionally attached to the money.

Right.

It's not about the money. Yeah. It's a solution.

Absolutely.

I did my job. I found a solution for them because they chose not to take it. That's not my fault.

Right.

Yeah.

They got to want. They got to want it more than you do. Okay. Last thing I want to hit today is talking about allocation strategies. Okay. I want to talk specifically about some ways that you can structure, structure the way that you allocate to the different index options within a product to try to obviously maximize returns. But I think that there are some ideas historically, you know, talking about diversification within allocation. And I think it has its place depending on the way that you're allocating. I think also that there are times where 100% allocation into one index strategy could be warranted. And it really depends on what's available there to you. But there's a couple of notes that I want to make on that. And first is if your client, if you're dealing with qualified funds and RMDs are really in the picture or you're dealing with an income type of product, I would highly, highly, highly recommend you set up their index strategies in a way to where you're trying to credit something back to them each year, set it. Because if you're taking RMDs or you're taking income, you're drawing things down. So if you're not simultaneously crediting back for two or three or four or some five years, you can really have these things sucked down. And now you're trying to credit it just. It can create a big, a big potential mess. Yeah. So try to credit back each year.

Well, and I'm very realistic. Remember, I always sell off of worst case scenario. So when I'm comparing any index, I'm always saying, remember your worst case Scenarios, you earn zero for the next 35 years.

Yeah.

And your death benefit goes away, but your income doesn't. That's what I base everything on.

Right.

But then I do, this is what's performed over the past 10 years. This is the worst 10 years and it's the best 10 years. But the reality is you always base everything off of the worst case scenario, which is your income guarantee.

Yeah. So yeah, use a mix annual point to points to your point to points, whatever that looks like for you. The other thing that I would encourage you to take note of is are these back tested returns, these annualized average returns coming because of super high par rates or super high caps or super low spreads? Or are they coming because the index has actually performed well? And that's one thing that's definitely worth looking at is what has the actual index done? And can that index return good, good returns with moderate par rates, moderate caps or moderate spreads? Or does it have to have those super high par, super high caps, super low spread spreads to try and create those returns? If you're dependent upon what the insurance company is willing to give up to create those returns, that's, that's a little bit of a, in my opinion, a little bit of a hairy dependency there because all it takes is they change their rates one time and now that index does not have the history or the ability.

If you have companies with high rate integrity, you don't have to worry about.

What it all comes down to.

Okay. So I hope this helps you. I hope you're not more confused now than you were when you started.

So give me a call. Just, just call.

You'll be even more confused. So, okay, have a great day and happy selling.