Response: Real Money vs. Not-Real Money

October 31, 2010 by Sheryl J. Moore

Setting It Straight with Scott Burns5

ORIGINAL ARTICLE CAN BE FOUND AT: Real Money vs. Not-Real Money 

Scott, 

I had the occasion to read your article, “Real Money vs. Not-Real Money.” You are correct in one regard on this article: the value of the annuities in question, accumulating at 8%, are “NOT the actual cash value” of the annuities mentioned by your reader. This is the value that the purchaser’s guaranteed lifetime income is calculated on, which is not available on cash surrender.

You are incorrect on several matters, however, and it is these inaccuracies that I wanted to reach-out to you on.

1. The Benefit Base of the indexed annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB), or the account balance that the purchaser’s lifetime income payments are based upon, is INDEED, “real money.” This money is available to them whenever they choose to begin taking income payments for life. The 8% guaranteed increase that your reader mentions is a strong benefit, if they are looking to defer income and increase this account balance in the interim.
2. The indexed annuity does in fact offer money that the purchaser “can get [their] hands on.” As I have mentioned to you before, the annuity purchaser is always 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 Some even allow as much as 50% of the annuity’s value to be withdrawn in a single year.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; quite the opposite of what you allude.
3. You say that “the insurance industry does a lousy job of explaining its products.” Interesting, but untrue Scott. These products are clearly and simply explained and disclosed in the materials that are provided to the purchaser. Do you think that the investment industry does a better job than the insurance industry in terms of “explaining its products?” For every one investor that reads their average 200+ page prospectus, I am certain I can give you at least ten annuity owners that have read their average 26.7 page indexed annuity contract.
4. I am absolutely ASTOUNDED that you suggest that your reader’s adviser was “doing OK by [them].” How can you make an assumption that your reader even has the risk tolerance to absorb losses? Isn’t it possible that they are unwilling to risk the losses that are associated with mutual funds, and more properly suited to a retirement income product which can guarantee zero risk of loss as a result of market downturn? Sure, indexed annuities aren’t intended to return consistent, double-digit gains, but they also promise no less than zero percent interest is credited annually. Maybe your reader finds this more palatable, with the offset being that an indexed annuity will not consistently return double-digit gains, but instead will credit 1% – 2% greater interest than fixed annuities and certificates of deposit (CDs) over the life of the contract. I would advise that you take note that not everyone is properly suited to investments, Scott.
5. Only two companies in the indexed annuity market use simple interest on their GLWB accumulation; on precisely eight indexed annuities (this is nominal when you consider that we have upwards of 20 insurance companies in the indexed annuity GLWB market and there are over 240 indexed annuities available today). The others all use compounded interest. Specifically, with one exception of the insurance companies your reader inquired about, the others use compound interest. I think you should clarify this, so as not to mislead your readers any more. 
6. Someone who is not interested in income should not be electing a GLWB on their annuity. However, those who are interested, and do elect this option, have a viable income solution. They don’t have a need to liquidate their annuity, as it is their source for steady, reliable, retirement income (they have alternative sources for emergency funds; this is ensured during the suitability process at point-of-sale) if they have elected a GLWB. For you to cast living benefits in such a negative light, as if they offer no value, is disingenuous.
7. While a life annuity will provide a higher than a GLWB, it offers no benefits if the annuitant dies. An indexed annuity with a GLWB will pay the full account value to the designated beneficiary. In addition, you do not have the flexibility of stopping/re-starting income, or changing your income amount on a life annuity. So, in essence, you are paying for flexibility with an indexed or fixed annuity GLWB. If this is not a cost that you are willing to pay for flexibility, then by all means, you should consider an income annuity (although many would be better-suited for a period certain income annuity, as opposed to a straight life annuity; this ensures that payments continue for a stated period, even if the annuitant dies the day after policy issue).
8.  You are OFF BASE by suggesting that election of a GLWB on an indexed annuity means a “reduction in [your readers’] retirement income as high as 40 percent.” Your comparison of a straight life annuity to an indexed annuity with a GLWB is an apples-to-oranges comparison. Go back to the drawing board, Scott. Your readers deserve better.

As always, if you would like to fact-check your articles, prior to publishing, I offer my services to you. I’m always more than happy to ensure that your readers are provided with accurate information on indexed annuities.

Thanks.

 Sheryl J. Moore

President and CEO

AnnuitySpecs.com

LifeSpecs.com

IndexedAnnuityNerd.com

(515) 262-2623 office

(515) 313-5799 cell

Originally Posted on October 31, 2010 by Sheryl J. Moore.