Response: Retirement Safety Comes with Earnings Cap
March 17, 2010 by Sheryl J. Moore
PDF for Setting It Straight with U.S. News & World Report
ORIGINAL ARTICLE CAN BE FOUND AT: Retirement Safety Comes with Earnings Cap
Mr. Philip Moeller,
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 an article that was published in U.S. News and World Report. This article, “Retirement Safey Comes with Earnings Cap” had several inaccuracies and misleading statements in it. I am contacting you to draw your attention to this misstatements, so that you can ensure your readers have access to accurate, unbiased reporting on annuities in the future.
Did you know that an annuity is the product used for our nation’s social security system? With that being said, it should not be hard for you to “love annuities.” Let me help in your understanding of annuities with some basic information on the products.
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.
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 |
There are three questions that must be answered, when looking into what type of annuity is right for an individual:
What level of market risk am I willing to assume with the annuity?
If more concerned about a high minimum guarantee, regardless of the lower level of interest accumulation, consider a fixed annuity.
If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest accumulation, consider an indexed annuity.
If willing to accept no minimum guarantee, in exchange for the possibility of unlimited interest accumulation, consider a variable annuity.
How soon will I be taking income?
If within the first year, consider an immediate annuity (offered in fixed, indexed, and variable types).
If it is further in the future, consider a deferred annuity (offered in fixed, indexed, and variable types).
How many premium payments will I be making?
If only a single payment, consider a single premium immediate annuity or a single premium deferred annuity.
If making more than one payment, consider a flexible premium deferred annuity.
It is also helpful to understand the difference between variable annuities and other types of annuities. Insurance products such as indexed annuities, fixed annuities, term insurance and whole life are fixed insurance products. Alternatively, products such as variable annuities, stocks, mutual funds, and bonds 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 and protect the purchaser’s funds from market risk. Investments, by contrast, can put all of a purchaser’s money at risk and are therefore appropriately classified as “risk money products.”
So, while it is true that variable annuities put consumer’s monies at risk, fixed and indexed annuities do not. Fixed and indexed annuities do not carry “high fees” either. However, all annuities have surrender charges, which is truly to the benefit of the purchaser. 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 purchaser’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the purchaser 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. I personally appreciate the value of the surrender charge on an annuity and if more consumers understood them, they would too.
I understand your concerns about “plan vanilla” products such as fixed annuities being utilized as part of Obama’s plan. However, did you know that indexed annuities are a type of fixed annuity that offers both a minimum guarantee, and the potential for limited gains based on the performance of the stock market? Indexed annuities are a perfect retirement vehicle for someone that is not willing to stomach the losses of investing directly in the market, but also wants the ability to outpace the earnings on traditional fixed money instruments (such as fixed annuities or certificates of deposit). The typical indexed annuity guarantees a return of nearly 118% at the end of the product term, even if the S&P 500 declines every single year. On the other hand, there are indexed annuities today that can pass on gains of 11.65% annually or more. This makes an indexed annuity the perfect product for risk-averse consumers who want the ability to outpace inflation.
Indexed annuities are priced to return 1% – 2% greater interest than fixed annuities. 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). What a tremendous value proposition for American consumers!
Unfortunately, the Insured Retirement Institute (IRI) is not the primary trade group for annuities. They have historically represented only variable annuity insurers and only began recruiting outside of this industry recently. They are certainly not representative of the fixed or indexed annuity industries. I cannot attest to the immediate annuity quote that was provided to you by the IRI. However, there are numerous immediate annuity payout options that would not result in an “estate getting nothing,” should the annuitant die shortly after purchase. For example, choosing a “life and period certain, 30 year” payout would ensure that the immediate annuity would pay out to the later of the annuitant’s death or 30 years. For this reason, your characterization of immediate annuities is inaccurate.
The average rate being credited on fixed annuities today is 3.84%. This does provide the ability to slightly outpace inflation. However, indexed annuities do hedge against inflation risk better than fixed annuities.
It is scary to consider that your readers would be suggested to “hold some investments that may be riskier than” they’d like. I encourage you to find out more about the features and benefits of indexed annuities as an alternative retirement income product.
Should you have a need for accurate information on annuities and insurance products in the future, please do not hesitate to reach out to us. Thank you, Mr. Moeller.
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
