Are S&P 500 Based Indexed Products on the Way Out?

The conclusion to this newsletter is that it’s time to move out of S&P 500-based crediting strategies for FIAs (Fixed Indexed Annuities) and IULs (Indexed Universal Life) and into VCIs (Volatility Control Indexes).

16-Page VCI White Paper

If you don’t know how VCIs work, I highly recommend you click on the following link to download my VCI white paper (most advisors I talk with do NOT understand VCIs):

Learn about the “Best” VCIs

To learn about the best VCIs in the industry (including the ones that I’ve illustrated in this newsletter), click on the following link:

Zero interest rates until 2024-the Federal Reserve announced it plans on keeping interest rates near zero until at least through the end of 2023. That’s not good news if you are selling an S&P 500-based FIA or IUL product.

Why are low-interest rates bad for S&P 500-based crediting methods in IULs and FIAs?

Because it hurts cap and/or participation rates (which depresses credited returns).

As all advisors should know, insurance companies take the premium for indexed products and buy income-producing bonds. The income is used to buy options on a stock index like the S&P 500 which drives the returns in products.

The bond portfolios are constantly turning over (older bonds mature and new bonds are purchased). Right now companies are replacing higher-yielding bonds with lower-yielding bonds.

Less money to buy options means lower cap rates and lower returns.

Volatility is back-until recently we’ve had prolonged periods of low volatility in the stock market. Why does that matter? Because the cost to buy options on the S&P 500 (which is used to drive returns in index products) goes up with volatility.

The Perfect Storm drives down caps on S&P 500-based indexed products

With low bond yields and higher volatility, caps on S&P 500-based products continue to drop.

Many IUL products that used to have annual caps of 11%-12% are now hovering around 9%.

With FIAs, annual point-to-point caps have also come down (recently they’ve been north of 6% and now they are sinking below 5% for most products).

Are indexed products dead? Nope. Insurance companies saw the writing on the wall with S&P 500 based products and within the last several years most started offering VCIs. VCIs cost less to hedge risk and are designed for more growth (due mainly to higher participation rates).

Let’s compare an annual point-to-point FIA using an S&P 500-based cap of 6% (where they were in 2019 with many products) with a VCI designed for growth.

  • S&P 500-based FIA in 2019 returned:               6%
  • VCI in 2019 returned:                                     16.55
  • I also found a different VCI that would have returned 25.95% in 2019*.
  • For context, one of my favorite FIAs with a VCI (with less volatility) returned 8.71% in 2019.

*This return was high because I illustrated the rate when you buy up the participation rate.

What about IULs? Let’s compare an IUL with a 10% S&P 500 annual point-to-point cap with my favorite IUL with a VCI.

  • IUL with 10% S&P 500 cap in 2019 returned:       10%
  • IUL with VIC in 2019 returned:                            19.89%

What’s the point of this newsletter?

  1.  It’s time to transition clients away from S&P 500-based indexes and into VCIs. That means when your clients come up for renewal on current products, you should be telling them to reallocate their money away into VCIs you trust. And when you sell new products, you might want to allocate the majority, if not all, of the money to VCIs.
  2. There are some really good VCIs out there that you should learn about (and if you are not familiar with FIAs and IULs, you owe it to your clients to learn and uses them as asset classes when appropriate).

Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society