Volatility Control Index White Paper – A Must Read if You Sell FIAs
To download my new 16-page VCI White Paper, click on the following link:
I figured since billions of dollars of FIAs (Fixed Indexed Annuities) are being sold each year using VCIs (Volatility Control Indexes), it was time to put out a white paper explaining how they work.
So, does that mean that most agents don’t know how they work? In a word….Yes!
Let me start out with a simple yet difficult to answer question:
What does it mean when they say the “target volatility” is between 5%-10%?
I’ll bet that 99% of those reading this newsletter do NOT know what an insurance company means whey they say their VCI has a target volatility of 5% or 10%.
If that is the case, then why are agents selling VCIs? Shouldn’t they wait to sell a product until they fully understand it? I think so, which is why I wrote this white paper.
How can advisors sell FIAs with VCIs if they don’t understand them? It’s simple. They sell using “back tested” numbers and charts like the following.
Only a few years ago, no one in the industry had ever heard of a VCI. While FIAs have been around for literally decades now, they almost all universally used the S&P 500 index (minus dividends) as the measuring index to credit growth on cash inside the product.
Pressure on S&P 500 annual point-to-point caps-back in 1999, caps on FIAs that used the S&P 500 had caps of upwards of 12%. Recently we’ve seen caps as low as 3%. Today caps are slowly starting to creep up (although still under 6%).
What’s the problem with low caps? Clients become a lot less interested in FIAs because growth on the accumulation value isn’t attractive enough to tie up their money in the product.
Increasing the yield-to find more yield insurance companies created VCIs. There are now dozens of VCIs in the marketplace and their “back tested” models show that they would have returned significantly higher internal rates of returns than an S&P 500 annual point-to-point cap product.
The concept behind VCIs is simple. When the stock market becomes volatile, the indexes change their investment mix to become more conservative. When volatility in the market subsides, the indexes change again to more aggressive investments.
In theory it should work, but understanding how VCIs work and which one is “best” for your clients is not easy to figure out.
What’s in the White Paper?
-I explain how VCIs work.
-I explain how VCIs are priced.
-I give examples of how several popular VCIs did in the recent stock market correction.
-I discuss how VCIs affect guaranteed income for life riders.
Unlike my 53-page Investment Risk White Paper (which I highly recommend everyone read (and you can do so by clicking on the following link: http://www.pomplanning.net/white.paper)) , this white paper is a pretty easy read that I’m confident advisors who are selling or are thinking of selling FIAs with VCIs will find helpful.
Roccy DeFrancesco, JD
144 Grand Blvd
Benton Harbor, MI 49022