Response: Equity Indexed Annuities Get Name Change

November 30, 2010 by Sheryl J. Moore

ORIGINAL ARTICLE CAN BE FOUND AT: Equity Indexed Annuities Get Name Change

Dear AnnuityNewsJournal,

I am an independent market research analyst who specializes in the indexed annuity and 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 and IUL 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 an article that you folks posted, “Equity Indexed annuities Get Name Change.” While your efforts to inform your readers are to be commended, your article had some grossly inaccurate information in it. Such misinformation reflects poorly not only on you, but also on Annuity News Journal. So that you will have access to accurate information on these products in the future, and so ANJ can make an appropriate correction to this article, I am reaching-out to you as the foremost authority in the indexed annuity market.

I would suggest that if you and Steve Thompson want me on your good side, that you make appropriate corrections to your article below:

1. An indexed annuity is not an investment. Variable annuities are the only type of annuity that can be called an “investment,” as these products place the purchaser’s principal and gains at risk due to market volatility. Stocks, bonds, and mutual funds are also investments. The Securities and Exchange Commission (SEC) is responsible for the regulation of such investment products. Fixed and indexed annuities, by contrast, are insurance products- similar to term life, universal life and whole life. Insurance products are regulated by the 50 state insurance commissioners of the United States (collectively referred to as the National Association of Insurance Commissioners, or NAIC). Insurance products do not put the client’s money at risk, they are “safe money products” which preserve principal and gains. Investments, by contrast, can put a client’s money at risk and are therefore appropriately classified as “risk money products;” they do not preserve principal. The NAIC does not permit the use of the word “investment” when referring to indexed annuities, as such.
2. Indexed annuities do not “guarantee equity-like returns.” Indexed annuities are promoted as ‘allowing the purchaser to have LIMITED participation in the market’s upside, while avoiding the downside risks associated with the market.’ You see, all gains on indexed insurance products must be limited through the use of a participation rate, cap, or spread. Perhaps it would help if I first started with a brief overview of how indexed insurance products work. Because indexed annuities are a “safe money place,” they should be compared against other safe money places. Investment products such as stocks, bonds, mutual funds, and variable annuities subject the purchaser to both the highs and the lows of the market. 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. 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. In addition, no indexed annuity owner has ever lost a penny as a result of market downturn. This is a strong value proposition that cannot be offered by any securities product with unlimited gains.
3. The SEC and FINRA have no regulatory authority on indexed annuities, and therefore should not be sought-out as authorities on these products. Interestingly, FINRA has been contacted and corrected numerous times on the inaccuracies in their Investor Alert on Indexed Annuities; further proving their ignorance on indexed insurance products. Just so that you understand, FINRA is responsible for the oversight of broker dealers and member firms that sell securities. The SEC is responsible for the regulation of such securities products. Neither firm has any regulatory authority on insurance products such as indexed annuities. In fact both FINRA and the SEC would prefer that indexed annuities were regulated as securities so that they can increase their revenue and job security. In the future, if you are looking for a reliable regulatory resource on fixed insurance products (such as indexed annuities), I encourage you to seek out Susan Voss or Jim Mumford at the state of Iowa Insurance Division (Susan is the commissioner and Jim is the deputy commissioner). Not only are they credible, but 38.62% of indexed annuity sales flow through Iowa-domiciled insurance companies; for that reason they have become authorities on indexed insurance products. Let me know if you need their contact information.
4. It is inappropriate to refer to indexed annuities as ‘equity-indexed annuities’ or ‘EIAs.’ Indexed annuities have not been called “equity-indexed annuities” or “EIAs” by those in the insurance industry 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. The interest potential of these products is limited, unlike equities investments. In addition, 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. Thank you.
5. Indexed annuities do not have “massive penalties” in the event of cash surrender. The average first-year surrender penalty on indexed annuities is less than 11% and even lower for older-aged annuitants.

Thank you for your efforts to take the high road of journalistic integrity in your efforts to increase your visibility in the annuity market. I will look forward to your corrections, which will go a long way in assisting you in attaining this goal.

Thanks.

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

Originally Posted on November 30, 2010 by Sheryl J. Moore.