InsuranceNewsNet Magazine February 2012 : 37
puRCHAsIng pOWER pRInCIpLE | AnnuITy the baseline indexed annuity stood at 1100 . As most agents understand, the down years in the market simply turn into zeros instead of losses for the cli-ent. In addition, with annual reset, gains in the indexed annuity can still be achieved even though the S&P 500 value is below the original value of 1000. So, the clients had gains of 10 percent over five years in their indexed annu-ity. Inflation brought the indexed annu-ity’s purchasing power to 971 . If the cli-ent had the indexed annuity, they would have only lost approximately 3 percent of their purchasing power compared to 25 percent in an S&P fund. March 2009 was an especially tough purchasing power time for people who invested directly in the S&P 500. The baseline S&P 500 value was at 625 . Fac-toring in inflation, the person’s purchas-ing power was down to 499 . So, the per-son lost more than half of their pur-chasing power when compared to what they could have purchased in 2000. The indexed annuity, however, performed much better. The baseline value stood at 1213 in March 2009, a little more than a 20 percent gain on their money nine years later. Inflation kept the purchasing power of the indexed annuity at 970 so people lost just 3 percent of the overall purchasing power instead of 50 percent. Fast forward once again to March 2011. The baseline S&P 500 was at 1082 , but the purchasing power value was only at 823 . This means that over the 11-year period, clients lost approx-imately 18 percent of their purchas-ing power. Another way to think about this situation is that the clients can now only purchase 82 percent of what they could have purchased in March 2000. For people in retirement and on fixed income, this situation would directly affect how the person lived. Take a look at the indexed annuity, however, which provided a much better situation for the client. The baseline value of the indexed annuity was 1337 and the pur-chasing power was 1016 . The indexed annuity kept up with inflation over the 11-year period. Obviously there were no real gains with the indexed annuity, but the clients could still purchase the same amount of goods in 2011 as they could in 2000, 1300 unlike purchasing an S&P 500 fund. InflatIon’s Impact on purchasIng power ( S&P 500 vs. IAs ) Never Forget Inflation 900 Inflation can be a damaging enemy for a client’s retire-ment funds. It is 500 ver y impor ta nt that agents discuss inflation with their YeaR clients, explaining 2000 2005 2009 2011 how detrimental it can be to their standard of living Baseline Value After Inflation Baseline Value After Inflation during retirement, using examples similar to those provided above. Jacob Stern is CEO of Imeriti, a By changing the conversation from national insurance marketing orga-nization based in San Diego. Imeriti gains or losses to purchasing power, cli-has been wholesaling investment-ents can gain a better appreciation of oriented life insurance to financial the power and protection of the indexed institutions, stockbrokers, financial planners and broker/dealers for more annuity. It is one of the few instruments than 30 years. He may be contacted at Jacob.Stern@ that can help clients hedge against infla-innfeedback.com. tion and reduce their volatility. Value S&P 500 ias February 2012 InsuranceNewsNet Magazine 37
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