Response: From Card Fees to Mortgages, a New Day for Consumers
July 1, 2010 by Sheryl J. Moore
PDF for Setting It Straight with NY Times
ORIGINAL ARTICLE CAN BE FOUND AT: From Card Fees to Mortgages, a New Day for Consumers
Tara and Ron,
As you both well know, 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 contacting you, for the second time in a one week period, as the authors of an article that was published in the New York Times, “From Card Fees to Mortgages, a New Day for Consumers.” As it has become typical with New York Times articles on indexed annuities, this piece had numerous inaccurate and misleading statements about indexed annuities in it. I am contacting you in response to these inaccuracies, to ask that you ensure that your readers have accurate, unbiased information on these products in the future. I am also copying numerous CEOs from the insurance industry on this communication, in the hopes that they will let your publication know that they do not appreciate the continuous miscommunications on fixed insurance products.
First and foremost, 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. I would ask you for your help in avoiding any such confusion, but it appears that you hold these words in disregard. Unfortunately, it is newspapers like the New York Times, which continue to refer to these products inappropriately, that truly perpetuate the misconceptions on these products in the media.
Second, and more importantly, indexed annuities are not “complex financial products.” They are just a fixed annuity with a different way of crediting interest. What is complex about having the ability to deposit your money with an insurance company, defer taxes on the monies until you begin taking income, receiving 10% withdrawals of the account value annually without being subject to penalties, and having the ability to pass on the full account value to your beneficiaries upon death? If you can understand all of this, then you can understand nearly every indexed annuity sold today.
Third, indexed annuities do not “require you to tie up your money for long periods of time and charge hefty surrender fees if you need to pull out your money early.” All annuities have surrender charges whether fixed, indexed, or variable. 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. Some even allow as much as 50% of the annuity’s value to be withdrawn in a single year. In addition, 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!
If more people understood what surrender charges do for the purchaser, they would appreciate them more. 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. I personally appreciate the value of the surrender charge on an annuity and if more consumers understood them, they would too.
Interestingly, the average first-year surrender penalty on indexed annuities as of 1Q2010 is 10.90%. Surrender charges decline annually beginning at the end of year one. This being the case, it is obvious that people are not “charge[d] hefty surrender fees” when accessing their monies above the penalty-free amount that is provided annually.
Fourth, what evidence do you have that “unscrupulous salesmen…used deceptive marketing techniques to sell these products?” As I have brought it to your attention in the past, the data doesn’t support your assertions. See data below from the National Association of Insurance Commissioner’s Closed Complaint Database:
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2006: 187
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2007: 235
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2008: 220
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2009: 148
Based on our research, this results in average annual complaints as follows:
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2006: 4.35
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2007: 4.12
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2008: 3.86
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2009: 3.29
So, not only have complaints on these products declined annually for the past three years, but the average has declined consistently for the past four years. Conversely, variable annuity complaints (which are overseen by the Securities and Exchange Commission) have always been greater than the number of indexed annuity complaints, and have risen in recent years. Certainly, we do strive for 100% customer satisfaction in the insurance market, but I would contend that an average of only 3.29 complaints per company is quite reasonable and not indicative of “deceptive” marketing techniques.
Fifth, indexed annuities do not pay “lucrative commissions.” The average street level commission on indexed annuities as of 1Q2010 was 6.34%. While it is true that there are a few of products with double-digit commissions, there are also products with commissions of less than 1%. And regardless of the fact that the double-digit commission products are the ones that you are seeing in magazine advertisements, these seven products (yes, only SEVEN products offer a double-digit commission!) accounted for only 2% of 1Q2010 sales. So, despite the fact that these are the annuities that are getting your attention, they are not the annuities that are selling today. In addition, you must consider that annuity commissions are paid one time at point-of-sale only. Compare this single commission to the generous, consistent commissions paid on products such as mutual funds, and I think you’ll agree that the commissions on these products are quite modest.
Sixth, these products have not been the “subject of many lawsuits” more than any other financial services instrument. The fact is that class actions lawyers make big money and members of class actions barely make out even. The big payoff is a huge motivator for litigators hoping to line their pockets. Interestingly, despite a staggering lack of wrongdoing in the indexed annuity industry, the insurance companies marketing these products have settled past class action lawsuits quickly to avoid negative publicity. It is cheaper to pay and get your name out of the press than to stay the course and stand firm on your cause. Class action lawsuits in this industry have been less prevalent than other insurance product class actions such as “vanishing premiums” on whole life and underfunded UL contracts. For the FACTS on class action lawsuits in the insurance industry, I encourage you to read my article at http://www.sheryljmoore.com/2010/01/ambulance-chasers-and-a-lack-of-responsibility/.
Seventh, the SEC has a vested interest in indexed annuities being regulated as securities. Furthermore, the SEC is not a credible source of information on indexed annuities. The SEC is responsible for the regulation of investment products. Stocks, bonds, mutual funds, and variable annuities are investments. Indexed annuities, by contrast, are insurance products- similar to fixed annuities, term life, universal life and whole life. Insurance products are regulated by the 50 state insurance commissioners of the United States. 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;” they do not preserve principal. Not only does the SEC have no regulatory authority on fixed insurance products, but they have a vested interest in indexed annuities being 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, the insurance commissioner of the state of Iowa. Not only is she credible, but 40.82% of indexed annuity sales flow through Iowa-domiciled insurance companies; for that reason she has become an authority on the products. Let me know if you need her contact information, and I am happy to oblige.
Eighth, indexed annuities have been regulated as fixed insurance products since their introduction to the insurance market on February 5, 1995. There has been no evidence to suggest that the 50 state insurance commissioners have done anything but a stellar job regulating these products. Again, it appears that you are unfamiliar with the currently regulatory structure that dictates the sales of indexed annuities, which is in-fact, very effective. Indexed annuities are regulated by the 50 state insurance divisions of the United States, which form the National Association of Insurance Commissioners (NAIC). These insurance commissioners regulate indexed annuities with rigorous standard non-forfeiture laws, advertising guidelines, suitability regulations, and other rules. The states hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines. An interesting comparison of state and federal regulation exists relative to annuity complaints specifically. If I need to make a complaint on an indexed annuity, the state insurance division has to respond to me within ten days; and I incur no cost in my efforts to resolve the problem. Compare this with the exhaustive complaint process on the securities side; delays, lawyers, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better than insurance regulation.
On the other hand, the SEC (who is responsible for the regulation of investments) has their hands full with the products that they are already regulating. For example, the SEC is the organization that let Bernard Madoff swindle $50 billion from American’s retirement nest eggs. Clear warning signs of Madoff’s fraud began to emerge as much as a decade before he was caught, and yet SEC did nothing. This is the same organization that many suggest regulate indexed insurance products? These people need to rethink their inclinations. I suggest that the SEC and FINRA get their own houses in order before they decide to put more on their plates.
Ninth, there is no need for “securities antifraud authority” on a product that is not a security! The NAIC has stiff penalties for insurance agents using any product to commit fraud against consumers. This includes those who sell products that are not suitable (such as those with unreasonable compensation). Plus, the NAIC currently “polices” the abusers in this industry. There is no need for duplicative regulation of these products! It will only result in increased expenses to the insurance company, which will be passed-on to consumers.
Tenth, need I remind you that NO INDEXED ANNUITY PURCHASER HAS EVER LOST A SINGLE PENNY AS A RESULT OF MARKET DOWNTURN? You are focusing on the wrong issues, here New York Times! Perhaps we should all begin questioning WHY the SEC wants to expand their regulatory authority to a product with low complaints, principal protection for consumers, and an adequate regulatory structure.
I am so angry to see that a once-reputable publication like the New York Times continues to perpetuate inaccurate information on these products. I certainly hope you hear an outcry from the insurance industry. Perhaps then, you will quit putting your mutual-fund advertisers first, and instead put your readers first and foremost. I urge you to reconsider a correction to this article. I believe it would make a tremendous difference in the eyes of many of your readers.
As always, should you have a need for accurate information on insurance products, particularly indexed annuities, please do not hesitate to contact me or my firm.
Thank you.
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
