Response: Inside Secrets: How Insurance Agents Get You to Buy
December 31, 2009 by Kathy Kristof
PDF for Setting It Straight with Kathy Kristof
ORIGINAL ARTICLE CAN BE FOUND AT: Inside Secrets: How Insurance Agents Get You to Buy
Dear Kathy:
I am an independent market research analyst who specializes exclusively in the indexed annuity (IA) and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.
I recently had the occasion to read your blog, “Inside Secrets: How Insurance Agents Get You to Buy.” While reading your blog, I noticed a number of inaccuracies. I wanted to reach out to you to assure that you properly understand these insurance products.
First, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990’s. The insurance industry has been careful to enforce a standard of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and volatility. Your help in avoiding any such confusion is so greatly appreciated.
Indexed annuities are not a “hybrid insurance product.” They are a fixed insurance product with principal protection, minimum guarantees, and the potential for greater interest than traditional fixed retirement products (such as fixed annuities and CDs).
I would be interested to know your source for the information that indexed annuities pay commissions “in the neighborhood of 7% to 14%.” In reality, there is not one single indexed annuity that pays a commission as high as 14% and the average commission for these products was only 6.43% for 3Q2009. Publishing such blatantly misleading and false information causes me to question your journalistic integrity, Ms. Kristof.
Every single indexed annuity ever developed has returned ZERO to the client in the event of a market decline. This is a far different appeal that “generally losing nothing.” To ensure that you properly understand how indexed annuities are intended to work, I would like to provide a brief overview. Indexed annuities are a “safe money place,” which protect the purchaser’s original payment. These products should be compared against other safe money places. They are regulated by the 50 state insurance commissioners of the United States. Products like stocks, bonds, mutual funds, and variable annuities are “risk money places,” where the client is subjected to both the highs and the lows of the market. These products are regulated by the Securities and Exchange Commission (SEC) because they are investments. It is inappropriate to compare any safe money place, such as an indexed annuity, to risk money places and it is most certainly not appropriate to compare safe money places to the market index itself. Indexed annuities are not intended to perform comparably to stocks, bonds, or the S&P 500 because they provide a minimum guarantee where investments do not. Indexed annuities are priced to return about 1% – 2% greater interest than traditional fixed annuities are crediting. In exchange for this greater potential, the indexed annuity has a slightly lesser minimum guarantee. So, if fixed annuities are earning 5% today, indexed annuities sold today should earn 6% – 7% over the life of the contract. Some years, the indexed annuity may return a double-digit gain and other years it may return zero interest. However, what is most likely to happen is something in between. All indexed interest on these annuities is limited through the use of a cap, participation rate, or spread. Were the indexed interest NOT limited, the insurer could not afford to offer a minimum guarantee on the product, and THAT is a variable annuity- not an indexed annuity. On the other hand, the client is guaranteed to never receive less than zero interest (a proposition that millions of Americans are wishing they had during the period of 03/08 to 03/09) and will receive a return of no less than 117% worst-case scenario on the average indexed annuity.
You say that the “gain can be paltry” on an indexed annuity. We have indexed annuities today that give the client the opportunity to receive a gain of 12.45% annually or more. I would hardly call this “paltry.” Tack-on the fact that the client is NEVER at risk due to market downturns, and I would argue that indexed annuities are very attractive today.
You argue that the “insurance company usually has the right to determine” the rate passed on the client. Actually, the primary determinant of the rate passed on to the client on indexed annuities is option prices. Option prices are out of the control of the insurance company. The second largest determinant is market volatility which is also out of the control of the insurer.
Despite your allusions that indexed annuity clients have their money locked-up, these products have generous liquidity provisions. The average surrender charge on an indexed annuity as of 2Q2009 was ten years. The average first-year penalty was 10.61%. The majority of these longer-term products were offered with a premium bonus, which provides an immediate boost to the client’s cash value. Longer surrender charges are necessary to appropriately price for such an incentive, but there are indexed annuities with surrender charges as short as one year and as low as 4.5%. Indexed annuities are some of the most flexible, liquid products available today. All indexed annuity purchasers are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties (some even allow as much as 20% to be taken annually). In addition, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the purchaser need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact every one of these products pays the full account value to the beneficiary upon death, and I think you would have difficulty inferring that these products are illiquid.
You are right- the annual reset provision of indexed annuities is valuable. When the market is low, the indexed annuity client is protected from further declines and they are also given the opportunity for tremendous gains when the market recovers. You might “rather bet on stocks than a product that provides principal protection but” less upside, Ms. Kristof. However, millions of Americans cannot stomach the risk of losing 20% in stocks at the opportunity to earn 20%. Indexed annuities are a product that best-serves consumers who want a little greater return than CDs or fixed annuities and cannot stomach the losses of being invested directly in the market.
Indexed annuities provide numerous benefits that you may be unaware of. Such benefits include, but are not limited to:
1. No indexed annuity purchaser has lost a single dollar as a result of the market’s declines. Can you say the same for variable annuities? Stocks? Bonds? Mutual funds? NO.
2. All indexed annuities return the premiums paid plus interest at the end of the annuity.
3. Ability to defer taxes: you are not taxed on annuity, until you start withdrawing income.
4. Reduce tax burden: accumulate your retirement funds now at a [35%] tax bracket, and take income at retirement within a [15%] tax bracket.
5. Accumulate retirement income: annuities allow you to accumulate additional interest, above the premium you pay in. Plus, you accumulate interest on your interest, and interest on the money you would have paid in taxes. (Frequently referred to as “triple compounding.”)
6. Provide a death benefit to heirs: all indexed annuities pay the full account value to your beneficiaries upon death.
7. Access money when you need it: indexed annuities allow annual penalty-free withdrawals of the account value, typically at 10% of the annuity’s value (although some products permit as much as 20% of the value to be taken without penalty). In addition, 9 out of 10 indexed annuities permit access to the annuity’s value without penalty, in the event of triggers such as nursing home confinement, terminal illness, disability, and even unemployment.
8. Get a boost on your retirement: many indexed annuities provide an up-front premium bonus, which can provide an instant boost on your annuity’s value. This can increase the annuity’s value in addition to helping with the accumulation on the contract.
In closing, I agree with you completely that your readers should understand the risks and rewards of indexed annuities and other products. They should also understand the techniques being used to sell products to them. You may also suggest that your readers purchase something other than an indexed annuity, but I would suggest that you do not understand them well enough to advise for OR against indexed annuities. Further proof of this is your allusion to Alan Roth’s post about his $100,000 challenge which is about a product other than indexed annuities. Sounds like you should leave the commentary on insurance products to the insurance folks and stick with investments, Ms. Kristof.
Should you ever have a need for reliable, accurate information on indexed annuities- please do not hesitate to reach out to my firm. Thank you.
Sheryl J. Moore
President and CEO
LifeSpecs.com
AnnuitySpecs.com
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax
