Response: Today’s lesson: Avoid equity-indexed annuities
March 11, 2010 by Sheryl J. Moore
PDF for Setting It Straight with Scott Burns
ORIGINAL ARTICLE CAN BE FOUND AT: The Statesmen
Mr. Scott Burns,
Good afternoon. 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 recently had the occasion to read your article that was published in the Texas Statesman. Your article, “Today’s lesson: Avoid equity-indexed annuities” was so inaccurate and biased that I had to take the opportunity to contact you about this misstatements. I know that your piece is commentary, but I am certain that a paper as prestigious as the Statesmen appreciates the accuracy of the information that they are providing to their Texas subscribers. In the wake of the stock market collapse, it is so very important that Americans have access to reliable, credible, accurate information on retirement income products. These people who have lost as much as half of their retirement dollars in the market, are now in a position to delay their retirement, and are looking for help in terms of what to do with their money. You do them a great disservice by disseminating information without fact-checking it prior to publication.
First of all, 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.
I can see that you do not understand annuities in general, and specifically indexed annuities. I think a basic discussion of product selection and risk profiles would benefit both you and your clients. 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.
In light of this information, I am certain you can see that it is inappropriate for you to make a blanket suggestion that an indexed annuity is “unlikely to be a good investment” for your reader’s friend. Do you even know the prospective client’s risk tolerance? You do not even realize that an indexed annuity is an insurance product, as opposed to an investment! How can you be in a position to advise this woman?
What is the basis for your statement that the indexed annuity will be “great for the salesperson?” I agree that they are great for the salesperson- because they can feel confident that they are protecting their client’s assets from the uncertainty of the stock market. Salespeople that have indexed annuities in their toolbox are better-equipped to serve the “safe money” needs of American consumers than other financial advisors in fact.
You say that “most people don’t understand exactly what their investment return is based upon.” Do your clients appreciate the fact that you make them feel as if they are not competent to make financial decisions? My goodness! As I mentioned, indexed annuities are not an investment. They are just a fixed annuity with a different way of crediting interest; quite simple really. In fact, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. So, if you can understand simple algebra, you can understand more than nine out of ten indexed annuities available today.
It never ceases to amaze me how people think that the dividends of the index being excluding from the crediting calculation of IAs is a bad thing. Let me drop a little knowledge on you, Scott. The insurance company never receives the benefit of the dividends on the index on an indexed annuity, because the client is never directly invested in the index. The insurance company invests the indexed annuity client’s premium payment in the general account, which protects them from declines in the index. The premiums are never invested in a pass-through account, which would provide the benefit of the dividends, but also expose the client to risk should the market decline. For this reason, the dividends cannot be passed on to the consumer. So you see, the insurance company cannot pass on the dividends if they do not have them to begin with.
You must also consider that an indexed annuity, although it does not include dividends in the crediting calculation, has a floor of 0% each year. The client can never lose any money as a result of market downturns. This is an invaluable feature in this type of annuity, and a benefit that many Americans (your clients included) could have benefitted from in 2008-2009. Were your clients invested directly in the S&P 500 during this time, they would have lost nearly 50% of their retirement funds during the period; albeit they would have the benefit of the index’s dividends. Also take into consideration that an indexed annuity uses the market’s low-point as the beginning point for the next year’s index calculation. So, indexed annuity purchasers have the opportunity to benefit consistently with potentially tremendous gains while the market is recovering. With stocks, these consumers would simply be trying to get back to square one.
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 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.
I have news for you, Scott. “Holding periods” and “penalties for early redemption” mean the same thing. It is misleading of you to give your readers the impression that they are two different things. Did you know that there are indexed annuities with surrender charges as short as three years and EVERY indexed annuity permits penalty-free withdrawals of 10% of the annuity’s value annually? In addition, some IAs even allow as much as 20% 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 these products pay the full account value to the beneficiary upon death, and I think that you’ll see that consumers have tremendous access to their cash value when they purchase indexed annuities. These are some of the most liquid retirement income products available today!
How disingenuous of you to suggest that indexed annuities have the “highest commissions in the industry.” Yes, there are precisely five products with a commission of 10% in this market. Those five products accounted for exactly 1.98% of indexed annuity sales in the fourth quarter of 2009. If you want a more accurate depiction of indexed annuity commissions, you’d be quick to note that the average street level compensation on indexed annuities as of 4Q2009 was 6.47%. This is a far cry from the compensation you suggest. Furthermore, this commission is paid to the agent one time, at policy issue, and the agent is expected to service the contract for life. Compare this to the generous, consistent commissions that are paid on products such as MUTUAL FUNDS, and I think you’ll see that the commissions paid on indexed annuities are quite fair.
How dare you suggest that commissions are what is driving sales of these products. Do you even look for data to back-up your preposterous comments before you publish them? Did it ever occur to you that these products have wonderful 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.
You would do well to do some fact-checking before you spurt such filth in the future, Mr. Burns.
As far as suggesting that your readers Google “equity-indexed annuities” and “class action lawsuits,” why don’t you also suggest that they Google:
• Whole life insurance + class action lawsuits
• Universal life insurance + class action lawsuits
• Variable universal life insurance + class action lawsuits
• Fixed annuities + class action lawsuits
• Variable annuities + class action lawsuits
If you want the TRUTH about lawsuits in the insurance industry, you’ll read my article about class action lawsuits in the insurance industry at http://www.sheryljmoore.com/2010/01/ambulance-chasers-and-a-lack-of-responsibility/. It clearly illuminates the fact that lawyers instigate class action lawsuits in the insurance industry, merely as a means to get paid big bucks. It is the most despicable form of legalized blackmail that I have ever witnessed in my professional career.
In the event that you are interested in building a relationship, so that you can have factual information to report in future articles, I invite you to please contact us. We are always more than happy to assist anyone in need of factual, accurate, and timely information about the indexed annuity market. Hopefully the Statesmen will take note of the inaccuracies in your article and make corrections. I know that thousands of Texas residents would truly appreciate receiving factual information from them in the future.
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
