Response: With Recent Market Conditions, are Equity Indexed Annuities a Good Option for Retirement Savings?
December 31, 2009 by John Houck
PDF for Setting It Straight with John Houck
ORIGINAL ARTICLE CAN BE FOUND AT: With Recent Market Conditions, are Equity Indexed Annuities a Good Option for Retirement Savings?
John,
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, “With Recent Market Conditions, are Equity Indexed Annuities a Good Option for Retirement Savings?” Although I greatly appreciate your efforts to educate your readers, there were some inaccuracies in the blog that I wanted to bring to your attention.
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.
Second, indexed annuities are NOT investments. They are insurance products, similar to fixed annuities, term life, universal life and whole life. Stocks, bonds, mutual funds, and variable annuities are investments. Insurance products are regulated by the 50 state insurance commissioners of the United States. Investments are regulated by the Securities and Exchange Commission (SEC). Insurance products do not put the client’s money at risk, they are “safe money products” which preserve principal. Investments, by contrast, can put a client’s money at risk and are therefore appropriately classified as “risk money products.” Investments do not preserve principal. In the future, it would be greatly appreciated if you would make the appropriate distinction between indexed annuities, which are insurance, and investment products.
Regarding your suggestions about product suitability, there are three questions that must be answered, when looking into what type of annuity is right for an individual:
1. What level of market risk am I willing to assume with the annuity?
a. If more concerned about a high minimum guarantee, regardless of the lower level of interest accumulation, consider a fixed annuity.
b. If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest accumulation, consider an indexed annuity.
c. If willing to accept no minimum guarantee, in exchange for the possibility of unlimited interest accumulation, consider a variable annuity.
2. How soon will I be taking income?
a. If within the first year, consider an immediate annuity (offered in fixed, indexed, and variable types).
b. If it is further in the future, consider a deferred annuity (offered in fixed, indexed, and variable types).
3. How many premium payments will I be making?
a. If only a single payment, consider a single premium immediate annuity or a single premium deferred annuity.
b. If making more than one payment, consider a flexible premium deferred annuity.
It is inaccurate to say, “If you are a short term investor looking for maximum return, then an equity indexed annuity is not for you.” There are indexed annuities with surrender charges as short as one year.
In addition, it is also not correct to say, “If you are looking for double-digit returns on your investment, you are not going to find them in an index annuity.” Although indexed annuities are not priced to consistently return double-digit gains, I’ve seen annuities that have earned as much as 30% in a single year. These products are priced to return about 1% – 2% greater interest than a traditional fixed annuity, over the life of the contract. So, some years the indexed annuity will receive zero percent interest, and some years it will receive double-digit gains. However, what is most likely to happen is something in between.
Although you are correct in pointing out that an indexed annuity does not include the dividends on the index, it is not appropriate to compare this product to an indexed mutual fund. The monies that back an indexed annuity are held in the insurer’s general account, unlike an indexed mutual fund- which is backed by a separate pass-through account. The insurance company never receives the benefit of the dividends on the index on an indexed annuity, because the client is never directly invested in the index. For this reason, the dividends cannot be passed on to the consumer.
Most importantly, indexed annuities do not “have fees that will get you in the back-end if you access your money prior to the maturity of the contract.” Indexed annuities do not have fees. There are a select group of insurance companies that offer optional Living Benefits (LB) riders on their contracts, in exchange for an annual fee. However, indexed annuities themselves do not have fees. In addition, I believe you may be inappropriately using the term “maturity of the contract.” The contract maturity is the latest date at which the annuitant MUST take income from the annuity (usually age 100+). I believe you are referring to the product term (i.e. seven years, if the product has a seven year surrender schedule).
It may surprise you to know that the average surrender charge on indexed annuities as of 2Q2009 was 10 years. The majority of these ten-year products also offered a premium bonus, which immediately boosts the client’s cash value. The average first-year surrender penalty for this same period was 10%, and lower for older annuitants. There are very few annuities left today that have “cliff” surrender charges, which do not decline annually. I hope this information assists you in your understanding of indexed annuity surrender charges.
If you should need a resource for your fact-checking on indexed annuities in the future, please do not hesitate to contact us. Thanks!
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
