Response: Possible securities fraud involving equity indexed annuities
November 15, 2010 by Sheryl J. Moore
PDF for Setting it Straight with White Law Group
ORIGINAL ARTICLE CAN BE FOUND AT: Possible securities fraud involving equity indexed annuities
Mr. D. Daxton White,
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 a post that was made at your website at ww.whitesecuritieslaw.com, “Possible securities fraud involving equity indexed annuities.” While your efforts to protect seniors from the unscrupulous are to be applauded, this posting had some very inaccurate information in it. Such misinformation reflects poorly on your firm, so I am contacting you (as the expert in the indexed annuity market), to ensure that you can make appropriate corrections to this post.
The first item I would like to draw your attention to is regarding the use of the term “EIA” or “equity index annuity.” Indexed annuities have not been called “equity-indexed annuities” 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.
Second, it is inappropriate to refer to indexed annuities as “investments.” 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 discussing indexed annuities, as such.
Third, you are incorrect that “there are no guarantees…the investments can go down.” All indexed annuities have a minimum guaranteed floor of at least 0%. NO INDEXED ANNUITY PURCHASER HAS EVER LOST A PENNY AS A RESULT OF MARKET DOWNTURNS. This means that regardless of the market’s performance, the annuity purchaser’s indexed annuity value is protected from ANY volatility. In addition, indexed annuities offer a secondary guarantee via the Guaranteed Minimum Surrender Value. So, even if the S&P 500 declined annually for the ten years, the average indexed annuity would return the premiums paid plus 18%.
Fourth, you are wrong in that indexed annuities have “no guarantees.” Indexed annuities’ guarantees include, but are not limited to:
- Guarantee of principal– the purchaser will not lose any of their payments as a result of market downturn
- Guarantee of gains– the purchaser will not lose any interest on their principal as a result of market downturn either
- Guarantee via floor– the purchaser is guaranteed to never receive less than 0% interest in any given year
- Guarantee via guaranteed minimum surrender value– the purchaser is guaranteed to receive premiums paid plus interest, regardless if the market consistently declines
- Guarantee against living too long– the purchaser is guaranteed an income that they cannot outlive
- Guarantee in the event of death– all indexed annuity purchaser pass-on the full account value to their designated beneficiaries in the event of death
- Guarantee via guaranteed benefits- (offered on fixed and indexed annuities, not just variable annuities) many indexed annuities permit guaranteed lifetime income without the inflexibility of annuitization
So, the guarantees in this product are phenomenal, contrary to what you suggest in your post.
Fifth, there are no indexed annuities available today with a guaranteed minimum rate of return greater than zero. In addition, a guaranteed minimum rate of return is NEVER able to be adjusted after the policy is purchased. That is why it is called a ‘minimum,’ Mr. White.
Sixth, no “companies deduct expenses” from indexed annuities. Indexed annuities do not have any explicit costs or fees, like variable annuities do, much less an expense charge. The “cost” that the client pays on an indexed annuity is merely time; via a surrender charge. The surrender charge on a fixed, indexed, or variable annuity is a promise by the consumer not to withdraw 100% of their monies prior to the end of the surrender charge period. This allows the insurance company to make an informed decision on which conservative investments to use to make a return on the clients’ premium (i.e. 7-year grade “A” bonds for a seven-year surrender charge annuity or 10-year grade “A” bonds for a ten-year surrender charge annuity). Investing the consumer’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the consumer on their annuity each year. In turn, it also protects the insurance company from a “run on the money” and allows them to maintain their ratings and financial strength.
Seventh, indexed annuities do not “often include high surrender charges in the early years, which tend to lock in the [purchaser] for several years.” The average surrender charge for indexed annuities as of 3Q2010 is ten years and the average first-year charge is less than 11% (even less for older-aged purchasers). In fact, indexed annuities are available with surrender charges as little as three years and as low as 5% in the first year (declining annually thereafter). In addition, every indexed annuity permits penalty-free withdrawals of 10% of the annuity’s value annually. Some even allow as much as 50% of the annuity’s value to be withdrawn in a single year. Plus, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact that these products pay the full account value to the beneficiary upon death, and it is clear that these are some of the most liquid retirement income products available today. This is not the picture that you would paint of them, Mr. White. Please take note of how liquid the products truly are.
Eighth, a longer/higher surrender charge does not necessarily make an “indexed annuity largely unsuitable for elderly or retired [purchasers]. As I mentioned above, the purchaser retains the right to liquidity via several options: penalty-free withdrawals, surrender charge waivers, Required Minimum Distributions, annuitization, or lifetime income via the Guaranteed Lifetime Withdrawal Benefit (GLWB). The elderly need the guaranteed lifetime income provided by annuities more than anyone, Mr. White. No other financial services product can guarantee an income that the purchaser cannot outlive. And with Americans living longer than ever, the need for annuities has never been greater.
What representations to you purport are being made about indexed annuities “by brokerage firms and insurance companies regarding the [annuities’] safety and suitability?” Indexed annuities are marketed by the insurance industry as products that provide a guaranteed lifetime of income, yet allow the purchaser to have LIMITED participation in the stock market’s upside, while avoiding the downside risks associated with the stock market. This is a sincere and honest proposition about the manner in which indexed annuities work. I’d be interested to see your representations to the contrary.
Ninth, the following companies that you listed as insurance companies you “are currently investing” no longer exist: Jefferson Pilot Life, AmerUs Life, and Fidelity and Guarantee Life. All of these companies were absorbed long ago in the course of mergers and acquisitions.
Tenth, but perhaps most interestingly, you have a link going to a website about Midland National Life on your page. This website was developed by a gentleman that drove from Pennsylvania to South Dakota to hold a Midland National VP hostage (after his insurance agent contract was terminated with them). You can find more information here: http://www.insurancejournal.com/news/midwest/2008/02/19/87439.htm. That you would use this website as a credible source of information is laughable, as it had innumerable inaccuracies about products, companies, and marketing of insurance products on it. In addition, the comment that was left on this page, in reaction to your posting, was left by the aforementioned terminated insurance agent. Due to his questionable credibility, I would suggest you remove the comment as well.
I would suggest that you revise your posting to reflect accurate information and remove the reference to the aforementioned website that has already been shut down.
I thank you for your genuine concern for indexed annuity purchasers. I just hope you limit the information that you distribute to these purchasers to the FACTS. Thank you for your time and attention to this matter, Mr. White.
Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
IndexedAnnuityNerd.com
(515) 262-2623 office
(515) 313-5799 cell
