Response: Build Your Own Annuity

October 4, 2010 by Sheryl J. Moore

PDF for Setting It Straight with CBS MoneyWatch

ORIGINAL ARTICLE CAN BE FOUND AT: Build Your Own Annuity

 Allan,

I am really starting to get the feeling that I may be able to get you to endorse indexed annuities by the end of 2010 after all! After reading the article below, it actually sounds like you would be a big fan if you understood indexed annuities better.

As you will recall, 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 only recently had the opportunity to read your article, “Build Your Own Annuity,” which was featured in your column at CBS MoneyWatch. You should know by now that I am going to call you on the misleading statements and misunderstanding about indexed annuities that are in this article! I’m sure you were anticipating it. I will also publish these corrections on the web. Hopefully, this will encourage you to reach out to me in the future, as the expert in the indexed annuity market, to ensure that have a reliable source for fact-checking indexed annuity information in the future. You’ll be happy to know that I’ve also copied your pal Jason Zweig from the “Intelligent Investor” column at The Wall Street Journal. I didn’t think it fair not to let him know about the issues with the “build your own annuity concept,” when it was he that developed it.

First, you know that I detest that you continue to call indexed annuities “equity indexed annuities.” As I have explained numerous times before, these products have not been called “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. It seems that in reality the only reason that the term “equity indexed annuity” continues to be perpetuated is because of reporters like yourself, who work for “credible” news sources, where your readers perceive that “Certainly no one like him would be wrong about such a thing! He is an expert at what he does!” Please, Allan, help us to ensure that Americans are not confused and know that there is a clear distinction between these fixed insurance products and equity investments. Your help in avoiding any such confusion is so greatly appreciated.

You say that indexed annuities are “ugly.” I know that the reason you hold this belief is that you do not properly understand indexed annuities. I only hope that your readers know enough to see past your biases and determine the value of these products for themselves.

Furthermore, you suggest that a consumer “bypass” the insurance company to create “more tax-efficiency.” It appears you are also failing to realize that the consumer pays no taxes on their principal or gains on a qualified annuity, as long as they defer income. Plus, annuities allow you to not only accumulate interest above the premium you pay, but also provide interest on your interest, and interest on the money you would have paid in taxes. (Frequently referred to as “triple compounding,” see below bullets) I’d say that is these features of an annuity are actually quite “tax-efficient,” Allan.

You also suggest that CDs should be the foundation for your annuity-alternative. Do you realize that fixed and indexed annuities have many valuable features, which a consumer cannot obtain with a CD? For example:

1. Annuities provide tax-deferral, where a CD cannot. (This is an important advantage for Americans who would like to sock money away while they are at a 35% tax bracket, and not be forced to pay taxes on the money until they are at a 15% tax bracket.)
2. Your average CD rate today is a whopping 0.75% annually (according to BankRate.com), whereas fixed annuities are currently crediting an average of 3.42% per year and indexed annuities are presently offering the opportunity to earn as much as 8.30% or more in a single year. (I’d say this benefit alone is compelling enough to choose the annuity over the CD.)
3. Annuities are backed by the claims-paying ability of the insurance company that issues it. (Have you noticed how many insurance companies have become insolvent lately? Perhaps because it is so very few. On the other hand, depositing your money with a bank has become a risky proposition as of late; consider that 298 banks have failed since the market collapsed in March of 2008.)

I guess overall, it would be hard to argue that an purchasing an annuity is much more compelling that a buying a CD today.

You say that “every annuity salesperson knows that the bonuses are the clincher in getting the client to sign on the dotted line.” However, your “build it yourself annuity” bonuses are not anything like annuity bonuses; they are merely product features. That being the case, I thought I’d illuminate you on some of the best features of fixed and indexed annuities:

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 the designated 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.
9. Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.

And Allan, you are wrong in that there is a “catch” with your “build it yourself annuity”- it is more complex than an actual annuity! And while the average indexed annuity contract is a mere 26.7 pages, not the 373 pages that you allude to, it is much simpler to read than your average 200+ page prospectus.

You are also wrong in that indexed annuities do not have “high costs and commissions.” I get tired of explaining this to you. There is no explicit cost with a fixed or indexed annuity, the client merely pays a “cost” of time- by promising not to surrender more than 10% of their money each year. In addition, the average indexed annuity commission is a one-time commission of 6.34% as of 3Q2010. This is hardly “high” as compared to the consistent, generous commissions that are paid annually on products such as stocks or bonds. And guess what? Indexed annuities have no expense ratios, either! Can you please try to get the facts straight about indexed annuities?!?

Why don’t you do all of your readers a favor and get some training on indexed annuities, Allan? You would certainly come-off as more knowledgeable if you did so, as your columns that mention indexed annuities are generally quite laughable. In addition, I truly believe you would find that there is a place for indexed annuities in many Americans’ retirement plans. Who knows? Maybe after getting educated on these products, you may just endorse them as vehemently as you did this second-rate-indexed-annuity-wannabe-alternative!

Take care, Allan. I always look forward to further opportunities to provide you with the FACTS on indexed annuities.

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

Originally Posted on October 4, 2010 by Sheryl J. Moore.