Response: COLUMN: Don’t rush into equity-indexed annuities
December 31, 2009 by Randy Price
PDF for Setting It Straight with Edward Jones
ORIGINAL ARTICLE CAN BE FOUND AT: COLUMN: Don’t rush into equity-indexed annuities
Randy,
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 wanted to contact you about your recent article in Alabama’s The News Courier, “COLUMN: Don’t rush into equity-indexed annuities.” There were several inaccurate statements in the article, which caught my attention. Because I know that a paper as prestigious as The News Courier wants to ensure that their content is accurate, and I know that you want your clients to find you credible, I am reaching out to assist you both.
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.
Third, sales of indexed annuities set a record for 2Q2009 at $8.394 billion. The reason that indexed annuity sales are on the rise is because of the failing equities markets. Americans are scared of losing more of their retirement dollars, and looking for products that offer safety, guarantees, and a preservation of principal. Indexed annuities are a logical choice, as these products offer all of these benefits and more. Such benefits of indexed annuities 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 fixed and indexed annuities pay the full account value to your beneficiaries upon death.
7. 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.
8. 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.
Fourth, indexed annuities are not hybrid fixed/variable annuities, as you suggest. There are two types of annuities: fixed and variable. Of the fixed variety, there are both traditional fixed annuities and indexed annuities.
Fifth, it is incorrect for you to say that “the EIA’s interest rate is typically lower than that of a fixed annuity.” Are you referring to the minimum guarantee on the indexed annuity? If so, the guarantee on a fixed annuity is not an apples-to-apples comparison with the guarantee on an indexed annuity. Fixed annuities have a guaranteed annual return minimum interest rate. This means a stated minimum interest rate is credited to the contract every year. An indexed annuity, by contrast, guarantees zero percent annually. The minimum guaranteed surrender value (MGSV) on an indexed annuity provides a secondary guarantee, which credits a stated interest rate to a percentage of premiums paid into the contract in the event the index does not perform or the client makes a cash surrender. This guarantee is not credited annually like the guarantee of a fixed annuity.
Sixth, you should never refer someone looking for information to a regulatory agency that has no authority or expertise on the product they are inquiring about. For this reason, the organization formerly known as the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA), is not credible source on indexed annuities, or any other fixed annuities. Indexed annuities are regulated by the 50 state insurance divisions, as they are insurance products. If one truly wants unbiased, accurate information on these products, they have one guaranteed accurate source: my firm. Alternatively, they can contact their local state insurance division at http://www.naic.org/state_web_map.htm.
Seventh, you say that “an EIA is not a simple product to grasp.” Randy, complexity is relative. Some would say that fixed annuities are complex. However, if someone can understand that they have the ability to deposit their money with an insurance company, defer taxes on the monies until they begin taking income, receive 10% withdrawals of the account value annually without being subject to penalties, and have the ability to pass on the full account value to their beneficiaries upon death- then they can understand nearly every indexed annuity sold today. As far as the indexed interest crediting is concerned, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. My grandmother didn’t even attend college, and she fully understands indexed annuities.
Eighth, you seem to lack knowledge on the basic concept of an indexed annuity. These safe money products are not intended to compete with stocks, bonds, mutual funds, or the index itself. Indexed annuities are intended to compete against other safe money products such as traditional fixed annuities and certificates of deposit (CDs). Indexed annuities (IAs) are only intended to provide 1% – 2% greater interest crediting than these traditional fixed rate products. Although some years an IA may receive double-digit gains, others it will receive zero. Over the life of the contract, the index annuity should outpace today’s fixed annuity rates by 1% – 2%. To compare this product to any equity investment is ignorant. A perfect candidate for an indexed annuity is someone who is too risk averse for a variable annuity, but wants the potential for higher gains than what they can earn on a fixed annuity- not someone looking for unlimited gains. All indexed linked interest on indexed annuities is limited. Were it not limited, the insurance company could not afford to pay for the minimum guarantee on the contract. That, dear Randy, is a variable annuity- not an indexed annuity. I’d say that millions of American consumers, such as myself, are quite happy for the difference while our equity markets have been tanking. While we are protected by the guarantees of indexed annuities, millions of Americans are losing their retirement dollars in variable annuities. This speaks volumes about the ability of indexed annuities to address the needs of American consumers during a volatile market.
Ninth, it is not accurate to say that “most EIAs only count the index gains from market price changes, excluding any gains from dividends.” ALL indexed annuities exclude dividends on the stock index from their calculation. An insurance company cannot include dividends on the indexed crediting formula because the client IS NOT DIRECTLY INVESTED IN THE INDEX. Again, the performance of these products is not intended to emulate that of stocks or other securities products. However, once you factor into the equation that the worst case scenario for an indexed annuity policyholder is ZERO, that benefit more than offsets those dividends. Personally, I know that A LOT of Americans who would be happy to be receiving zero right now, rather than receiving negative adjustments to the value of their retirement funds.
Tenth, all annuities have surrender charges which discourage the annuity owner from fully cash surrendering the product before the expiration of the product term. These surrender charges are merely what allows the insurance company to credit competitive interest rates to the annuity, during the time that the client has agreed to keep their money with the insurance company. The insurance company invests the consumer’s premiums, in order to make a return on the money, and credit a competitive interest rate. Without a surrender penalty, the insurance company would incur tremendous expenses that they would not be able to recover. In short, surrender charges are a pricing measure that allows insurance companies to make good on their promises, and back-up their claims-paying abilities. In your discussion of indexed annuity liquidity, I see that you have missed several important facts:
1. All indexed annuity owners are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties
2. Some indexed annuities even allow penalty-free withdraws of 20%
3. Nine out of ten 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
4. All indexed annuities pay the full account value to the beneficiary upon death
Quite contrary to your characterization, indexed annuities are some of the most liquid retirement products available today.
Eleventh, it is obvious to me that you did not do your research when you make statements like, “some EIAs also require you to forfeit your index-linked interest if you surrender your contract early or choose not to begin taking payments when the contract matures.” The product you are referring to is a two-tiered indexed annuity. Only one of these products exist today, and sales of this product were only 1.65% for 2Q2009.
Twelfth, it is absolutely disingenuous for you to say that there is a “lack of regulation” in the indexed annuity market. The 50 state insurance divisions that regulate indexed annuities require the full and proper disclosure of these products; they apply rigorous standard non-forfeiture laws. In addition, these regulators manage producer licensing, enforce continuing education requirements, implement advertising guidelines, apply suitability regulations, and hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines.
Thirteenth, regulation by the Securities and Exchange Commission (SEC) is different, but not necessarily better. Specifically, if I am an indexed annuity policyholder, and I have a complaint, all I need do is write the Iowa Insurance Division, and I am guaranteed a response to my complaint in TEN DAYS. By contrast, if I had a complaint with a variable annuity, I would be subjected to working through lawyers, paying hefty fees, and spending months for a resolution on my complaint. Furthermore, I’d venture to say that consumers have a much easier time reading through their average 26.7 page indexed annuity contract, than they do reading through the average 200+ page prospectus on a variable annuity. Yes, Randy, SEC regulation is different, but that does not make it better.
Fourteenth, you are wrong about indexed annuities being “primarily sold by individuals who are not registered to sell securities.” In fact, 55% of all agents selling indexed annuities ARE registered representatives.
Fifteenth, and perhaps most incredulous, is your suggestion that an agent selling an indexed annuity “may not look at your entire financial picture before recommending an EIA.” It is no more accurate for you to say this about an agent selling these products, than an agent selling mutual funds. In reality, agents selling indexed annuities provide a rigorous suitability review for every one of their clients. In fact, more than 2/3 of the states in this nation have adopted the National Association of Insurance Commissioner’s (NAIC’s) Suitability in Annuity Transactions Model Act. So, insurance agents selling indexed annuities must consider more than fifteen suitability factors including age, annual income, annual expenses, investment objectives, liquidity needs, and risk tolerance. In light of this information, I’m certain you can see how erroneous your statements about insurance agents’ indexed annuity suitability reviews are.
Sixteenth, an indexed annuity is the only product that can guarantee consumers an income that they cannot outlive, while also providing a minimum guarantee and the ability to earn index-linked interest. The risk profile of someone purchasing an indexed annuity is much different than the person purchasing a variable annuity. You would do well to note the differences in these risk profiles; I’m certain both Edward Jones and your clients would GREATLY appreciate it.
Randy, you suggest that people should “do [their] homework before making any EIA purchase decision.” You are right- they should. ALL people should do their homework before purchasing ANY insurance or investment product- that’s just good decision making. I suggest that you should take your own advice and DO YOUR HOMEWORK on indexed annuities, Randy. Perhaps next time, it will save you from making so many false and disparaging statements in a public forum.
Hopefully, The News Courier will also do their homework before publishing such biased and inaccurate articles in the future. A correction to your piece would be a good place to start, should they wish to ensure that their readers are properly informed. Today, millions of Americans are looking for information on how to protect their money. It is sad to see that such a fine publication would run with a piece, where the author chooses to consciously make the decision to mislead these information-hungry Americans.
Should you ever have a need for accurate information on these products in the future, please do not hesitate to reach out to us.
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
