Response: Planning to Buy Retirement Fund? Stay Away from Indexed Annuities
October 31, 2010 by Sheryl J. Moore
Setting It Straight with Varun Walia
ORIGINAL ARTICLE CAN BE FOUND AT: Planning to Buy Retirement Fund? Stay Away from Indexed Annuities
Dear Ms. McDonough and the team at BrightHub.com,
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 recently had the occasion to read an article that was published Bright Hub and edited by Ms. McDonough, “Planning to Buy Retirement Fund? Stay Away from Indexed Annuities.” While your efforts to provide information to your readers are to be applauded, this article was perversely inaccurate. Such misinformation reflects poorly on your website, so I am contacting you (as the expert in the indexed annuity market), to ensure that you can make appropriate corrections to this article and have a reliable source for fact-checking in the future. I only wish that I had an email address for the author, Varun Walia, as well. He obviously has much to learn on these products before he should write about them in a public forum again.
First of all, it is inappropriate to refer to indexed annuities as an “investment.” Variable annuities are the only type of annuity that can be called an “investment,” as these products place the purchaser’s principal and gains at risk due to market volatility. Stocks, bonds, and mutual funds are also investments. The Securities and Exchange Commission (SEC) is responsible for the regulation of such investment products. Fixed and indexed annuities, by contrast, are insurance products- similar to term life, universal life and whole life. Insurance products are regulated by the 50 state insurance commissioners of the United States (collectively referred to as the National Association of Insurance Commissioners, or NAIC). Insurance products do not put the client’s money at risk, they are “safe money products” which preserve principal and gains. 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. The NAIC does not permit the use of the word “investment” when discussing indexed annuities, as such.
Interestingly, the vast majority of indexed annuities are not sold by “investment advisors,” as an investment advisor must also be licensed insurance agents to do so. With the consistent, lucrative commissions that are paid on products such as mutual funds, this option does not tend to be an attractive prospect for “investment advisors.” Therefore, Mr. Walia would do well to note that indexed annuities are sold by licensed insurance agents.
Unfortunately, Mr. Walia has the facts twisted when he says that there is an “untold story about capped returns.” In reality, the indexed annuity industry markets these products as allowing the purchaser to have LIMITED participation “in the stock market’s upside,” while avoiding the downside risks associated with the stock market.” This is no secret! I think it would help if your staff understood the true gain potential for indexed annuities, and how they are intended to work. Because indexed annuities are a “safe money place,” they should be compared against other safe money places. Investment products such as stocks, bonds, mutual funds, and variable annuities subject the purchaser to both the highs and the lows of the market. 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. (Despite what Mr. Walia would lead your readers to believe.) 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. 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. In addition, no indexed annuity owner has ever lost a penny as a result of market downturn. This is a strong value proposition that cannot be offered by any securities product, and the primary driver for increasing sales of these products. Hopefully this explanation will assist you in gaining greater insight into the mechanics of indexed annuities.
I have to admit that while I place the primary responsibility of fact-checking with Mr. Walia, I am disappointed that you, as an editor Ms. McDonough, seem to have failed to verify some very basic information in this article. For example, indexed annuities do not “lock up” the purchaser’s principal for 15-20 years. My firm regularly releases statistics on sales by surrender charge on indexed annuities. Fortunately, sales are far different than depicted in this piece with more than half of all products being sold in a ten-year duration. There are no indexed annuities with a 20-year surrender charge at all. In fact, there is only one indexed annuity with a surrender charge that exceeds 15 years. On the other hand, there are numerous indexed annuities with surrender charges as short as three years.
What Mr. Walia fails to understand and communicate is that 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. So you see, surrender charges are not negative, as Mr. Walia frames them to be: they actually work on behalf of the client’s interests.
Meanwhile, the annuity purchaser is still provided access to a portion of their monies in the event of emergencies. 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. 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 it is clear that these are some of the most liquid retirement income products available today. Conversely, this article alludes that these products are illiquid. That is simply not the case.
Another simply inaccurate statement that fact-checking could have easily prevented is that an “indexed annuity is designed with emphasis on fund management.” Indexed annuities do not have funds! There is no way for the indexed annuity to invest in funds via their annuity purchase. For these reasons, there are no such things as “fund manager” or “fund management” in the indexed annuity market. This is reserved only for variable annuities, which not only allow the purchaser to invest in funds, but also put the purchaser at risk of losing large sums of money if not properly managed. An indexed annuity, in contrast, can never lose money as a result of market downturn. (Which is the primary reason there is no need for a “fund manager” in this market.) These facts would have been quite obvious to anyone looking for basic information on indexed annuities on the internet.
Furthermore, there are absolutely no “fees” on indexed annuities: for procedures, operations, fund managers, or otherwise. Mr. Walia needs to take a continuing education course on these products if he wants to be better-equipped to inform his readers about them. It appears he is confusing variable annuities with indexed annuities; the products are very different from one another.
Further reiterating your author’s lack of factual information on these products is his assumption that “chances are that it’s been sold to you.” Only 8% of insurance agents sell these products and only 2% of Americans have ever heard of them. These sad statistics are the reason I quit my “safe” position working for an insurance company, and decided to start a firm that could educate others on these products six years ago. If I had been informed on these products in the late 1990s, perhaps I would have chosen an indexed annuity as MY retirement vehicle (instead of a 401(k) that my employer forced upon me, despite my risk tolerance), and avoided losing 50% of retirement fund when the market collapsed at the turn of the century. For this reason, I have made it my life’s work to set the record straight on indexed insurance products, and ensure that more people become educated about them.
Your readers have been done a great disservice with this article. What they NEED to know is that indexed annuities have many benefits, including (but not limited to):
- No indexed annuity purchaser has lost a single dollar as a result of the market’s declines. Can Mr. Walia 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 the designated 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.
- Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
Mr. Walia says that indexed annuities are “beset with pitfalls and downsides.” He further asserts that “there are several negatives which are intentionally or unintentionally kept secret.” Mr. Walia does not understand indexed annuities at all. If he got this much wrong on a single article he wrote for you, I’d hate to see all of the mistakes in the rest of his work. Please remove his article from the internet, until he is able to make appropriate corrections. If I can be of assistance now, or in the future, in providing fact-checking assistance on insurance products, please do not hesitate to reach-out.
Thank you.
Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
IndexedAnnuityNerd.com
(515) 262-2623 office
(515) 313-5799 cell
