Response: Equity Indexed Annuities — The Bitter Truth
March 24, 2010 by Sheryl J. Moore
PDF for Setting It Straight with ProWriter
ORIGINAL ARTICLE CAN BE FOUND AT: Equity Indexed Annuities — The Bitter Truth
Dear Mr. “ProWriter,”
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 am writing to you about a blog that you authored at http://www.xomba.com/equity_indexed_annuities_bitter_truth, “Equity Indexed Annuities – The Bitter Truth.” This blog had several inaccuracies and misleading statements in it. I am contacting you to draw your attention to this misstatements, so that you can avoid embarrassment in the future and ensure your readers have access to accurate, unbiased reporting on annuities forthwith.
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 downturn and volatility. Your help in avoiding any such confusion is so greatly appreciated.
Second, and VERY importantly, indexed annuities are NOT variable annuities. Here is a brief explanation of each of the types of annuities:
Annuity Risk Spectrum
| Guaranteed Interest | Upside Potential | Indexed Participation | Client’s Risk Tolerance | |
| Fixed (Traditional) |
Typically 2% | Very Limited: typically less than 5.50% | None | Low |
| Indexed | Typically 87% of premium @ 3% | Limited: typically capped at less than 9.00% | Gains based on performance of external index | Moderate |
| Variable | Fixed account only | Unlimited | Gains based directly on fund performance | High |
What is a Fixed Annuity (FA)?
A contract issued by an insurance company that guarantees a minimum interest rate with a stated rate of excess interest credited, which is determined by the performance of the insurer’s general account. A Fixed Annuity is considered a low risk/low return annuity product.
What is an Indexed Annuity (IA)?
A contract issued by an insurance company that has a minimum guarantee where crediting of any excess interest is determined by the performance of an external index, such as the Standard and Poor’s 500® index. An Indexed Annuity is considered a moderate risk/moderate return annuity product.
What is a Variable Annuity (VA)?
A contract issued by an insurance company where crediting of any interest is determined by the performance of underlying investment choices that the annuity owner selects. A Variable Annuity is considered a high risk/high return annuity product.
An indexed annuity is an insurance product, not an investment. Other insurance products include fixed annuities, term insurance and whole life. Alternatively, investment products include variable annuities, stocks, mutual funds, and bonds. 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 all of a client’s money at risk and are therefore appropriately classified as “risk money products.” Investments do not preserve principal where insurance products do. I hope that assists you with your understanding of indexed and variable annuities.
Third, the insurance company puts the clients indexed annuity premium in their general account, not in a separate pass-through subaccount. In a general account, the client’s purchase payment is never at risk due to market fluctuations as monies allocated to a separate pass-through subaccount would be.
Fourth, it is absolutely asinine to suggest that stock indices are “the best way of investing your money into the stock market if you’re looking to maximize gains while keeping risk to a minimum.” You fail to realize that every consumer has a different risk profile and many are simple unwilling to stomach the potential losses of the market in order to maximize their gains. In addition, investing directly in the stock market in no way keeps risk to a minimum. Do you honestly have any experience in the financial services industry? This is a basic premise of investing and even high school graduates know this simple concept of investing.
You are right, however, in comparing “playing the market” to playing the lottery. You may “win big,” but you are more likely to lose big with this strategy.
Fifth, annuities are nothing like playing the market, “ProWriter.” Annuities are a type of insurance; they guard against the risk of living too long. An annuity is the only financial instrument that can guarantee an individual an income that they can never outlive. In addition, indexed annuities have many other benefits (including, but not limited to):
- 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.
- All indexed annuities return the premiums paid plus interest at the end of the annuity.
- Ability to defer taxes: you are not taxed on annuity, until you start withdrawing income.
- Reduce tax burden: accumulate your retirement funds now at a [35%] tax bracket, and take income at retirement within a [15%] tax bracket.
- 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.”)
- Provide a death benefit to heirs: all fixed and indexed annuities pay the full account value to your beneficiaries upon death.
- Access money when you need it: fixed annuities allow annual penalty-free withdrawals of the account value, typically at 10% of the annuity’s value (although some indexed annuities permit as much as 20% of the value to be taken without penalty). In addition, 9 out of 10 fixed and 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.
- Get a boost on your retirement: many fixed and 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.
- Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
Sixth, you think that the limiting of interest on indexed annuities is a detriment when it is not. 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 stock 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 that 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.
Seventh, there are precisely 6 indexed annuities that use a high watermark crediting method today. That is precisely 2% of products on the market, and hardly representative of the average indexed annuity.
In all honesty, sir, you have both the potential to become a “Pro Writer” and a “Pro Advisor” if you would learn more about the financial services industry. At this point, I would suggest that you refrain from writing about these products until you obtain such training.
Should you have a need for accurate and reliable information on insurance products in the future, please do not hesitate to contact my firm. Thank you!
P.S. Ask us about our new TOTALLY FREE website, www.IndexedAnnuityNerd.com!
Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
IndexedAnnuityNerd.com
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax
