What many don’t realize is that financial products are “on sale” right now as well. I’m not talking about traditional costs such as bank charges, credit card fees and mutual fund loads. Those are actually probably higher right now for most. I’m also not referring to the cost of life, auto or home insurance premiums (which may actually be down in some instances). I’m actually talking about OPPORTUNITY cost, and it’s never been lower.

Opportunity cost is frequently discussed in business. If a company is evaluating a new venture, but must forgo other current or readily available alternative ventures to do so, the return on those alternatives is the opportunity cost. The same concept applies to personal finance. What current or readily available venture (i.e. financial product) would your client forgo in order to participate in a new venture? The answer is different for everyone, but it might be Certificates of Deposit and Money Market Accounts. The yields on these instruments are reaching the point of insignificance. Let’s assume the client can get a yield of 0.85% in a money market account right now.* If this rate stays the same for one year (it’s not guaranteed), the interest payment on a $10,000 deposit would be $85. That $85 represents your client’s opportunity cost.

If we can agree that opportunity cost is low, the next question is: “What product should my client utilize in lieu of CDs or MMAs?” There are too many options to consider here, but let’s examine a few. Equities provide more upside potential for the cost, but they also introduce downside risk. Volatility has been historically high over the last two years, but if the consumer is willing to assume the risk, then equities remain a viable alternative. Bonds typically provide greater yields than CDs/MMAs, but they are far from riskless. In addition to defaults, rising interest rates can quickly decimate the value of a bond portfolio. Real Estate remains depressed and, depending on the day, is poised for either a miraculous rebound or another precipitous decline.

To summarize: Opportunity costs are low, but risk and volatility for most asset classes are high. This is exactly the situation for which Fixed Indexed Annuities were designed. By putting your client’s money in an FIA, they sacrifice very little (low CD/MMA rates) and avoid the high levels of volatility present in most investments. Premium dollars are flowing into FIAs at a record pace. According to LIMRA, premiums were up 9% in 2009, **which was a record year for FIA sales. 2010 is on pace to meet or exceed 2009. Still, given the scenario described, sales of Fixed Indexed Annuities should be even higher. What objections do people have to FIAs in this environment?

Objection: I want to be liquid in order to capitalize on a potential increase in interest rates.

Rebuttal: This basically amounts to trying to time the interest rate market, a feat no one has accomplished over any extended period. An FIA with $100,000 premium and an average 3% interest credit would have an accumulated value of $115,927 after 5 years. Now examine a CD/MMA that averages 1% interest for 1, 2, 3, or 4 years, and how much interest rates would need to rise in the remaining years to “catch-up” to the FIA.

Will any interest rate increases be enough to match the rates currently available in FIAs?

 

Objection: Fixed Indexed Rates are low, and I don’t want to be locked into low rates.

Rebuttal: Again, this is interest rate timing, but trying to time FIA rates rather than CD rates. If this is a concern for your client, there are many short duration FIAs which allow a surrender-charge-free exit in as few as 3-6 years. There are also many longer term FIAs with fantastic liquidity options, allowing your client access to a portion of the accumulated value surrender-charge-free - funds they can use to capitalize on other FIA or CD rates if they do rise.

Taxable amounts withdrawn prior to age 59½ may be subject to a 10% IRS penalty in addition to ordinary income tax.

There are certainly many other objections to using FIAs in the current environment, and for every objection, there may be an FIA that overcomes it. Creative Marketing has a highly knowledgeable staff – make use of them to find the best product for your client in this or any other environment.

FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC 11122 - 2010/7/8 | 16505 1814110

*per bankrate.com 6/17/10 national average MMA 0.78%

**LIMRA U.S. Individual Annuity Sales Report

Withdrawals in excess of the free amount are subject to withdrawal charges, premium bonus recapture charges and may also be subject to a market value adjustment. Any RMD is considered part of the free withdrawal for that year. Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.