Response: The ABCs of doing due diligence on fixed income annuities
April 5, 2011 by Sheryl J. Moore
PDF for Setting it Straight with Ron Rhoades
ORIGINAL ARTICLE CAN BE FOUND AT: The ABCs of doing due diligence on fixed income annuities
Dear Mr. Rhoades,
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 you authored for RIABiz.com, “The ABCs of doing due diligence on fixed income annuities.” This article was inaccurate to the point it makes a mockery of RIABiz.com as well as Joseph Capital Management and Alfred State College. Such misinformation reflects poorly on these reputable institutions and yourself, Mr. Rhoades. It is for this reason that I am contacting you, to ensure that you can make appropriate corrections to this article. I am also reaching-out so that you can have a reliable source for fact-checking in the future.
First of all, I need for you to know that 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 referring to indexed annuities, as such.
Second, Indexed annuities are not as complex as most perceive them to be. They are just fixed annuities with a different way of crediting interest. Furthermore, complexity is relative. Some would say that fixed annuities, which are the simplest retirement income product offered by insurance companies, are complex. However, if someone can understand that they have the ability to deposit their money with an insurance company, defer taxes on the monies until they begin taking income, receive 10% withdrawals of the account value annually without being subject to penalties, and have the ability to pass on the full account value to their beneficiaries upon death- then they can understand nearly every indexed annuity sold today. As far as the indexed interest crediting is concerned, 98.4% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B.
Note that the perceived complexity of indexed annuities stems from the historical practice of offering numerous, complex, unique crediting formulae on the products. Historically, there have been as many as 42 different ways of calculating indexed interest on these products. However, since hitting that high point in the year 2000, the number of unique crediting methods on indexed annuities has declined annually and sits at 11 today. Of these eleven different methods, nine use the calculation (A-B)/B to calculate the gain.
Third, and perhaps most importantly, indexed annuities do not have “high fees and costs.” Indexed annuities have no explicit fees or costs, Mr. Rhoades. It sounds like you are confused. Not all annuities have “fees” the way that deferred variable annuities do. Income annuities as well as fixed and indexed deferred annuities specifically have no explicit fees. The “cost” that the client pays on a fixed or indexed annuity is merely time; via a surrender charge. 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. Some annuities may have optional features that the purchaser can choose to add-on to the base contract, in exchange for an annual fee. However, indexed annuities do not have fees in and of themselves.
Fourth, the sales disclosures on indexed annuities are not only clear and intimately detailed, but they are communicated in plain-language (as mandated by the NAIC) and provided in a minimum font size to every person who purchases an indexed annuity.
Fifth, what is the basis for your statement that indexed annuities have “lax insurance sales practices?” I would urge you not to perpetuate the misinformation on indexed annuities that has been fueled by the popular media, as the facts do not support your assertion. Data from the National Association of Insurance Commissioner’s Closed Complaint Database on annuities shows that complaints on indexed annuities are relatively low:
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 indexed annuities declined annually for several years, but the average has declined consistently for years as well. 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, Mr. Rhoades, but I would contend that an average of only 3.29 complaints annually, per company, is quite reasonable and not indicative of “lax insurance sales practices.”
Sixth, the regulatory regime of the SEC is not supreme to the regulation provided by the NAIC. Let me enlighten you with an overview of financial products’ regulation. Investments (products where consumers risk the loss of principal AND gains) such as stocks, bonds, and mutual funds are regulated by the SEC and the Financial Industry Regulatory Authority (FINRA). Indexed annuities are fixed insurance products; similar to fixed annuities and whole life insurance. These fixed insurance products never put the purchaser’s principal or gains at risk due to market volatility. Indexed annuities, like other fixed insurance products, are regulated by the 50 state insurance commissioners of the United States. Together, they form the NAIC.
The 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, arbitration, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better than insurance regulation.
Most, like you, perceive insurance regulation to be lacking have an inappropriate frame-of-reference. They see that the SEC regulates products such as variable annuities, and in these transactions the NAIC is responsible for the insurance company’s solvency. Therefore, they assume that with insurance products, there is no regulation- only a regulator ensuring company solvency. They do not understand that with non-registered products, the NAIC performs the same functions that FINRA and the SEC do on the securities side: market conduct regulation, suitability enforcement, etc. If more people understood the state regulatory structure, such a misconception would not persist.
Seventh, I hate to break it to a J.D., but the SEC never had oversight over indexed annuities. Despite the fact that they had proposed and embraced Rule 151A, it was set to go into effect after the Dodd-Frank Act was signed into law. In addition, requiring SEC regulation of a product that is already regulated by the NAIC would have added an unnecessary, duplicative, second layer of regulation to this product. This would have only resulted in increased expenses which would ultimately be passed-on to the purchaser.
Eighth, you make it sound as if the suitability standards for fixed and indexed annuity sales have been improved by the recent roll-out of an enhanced Suitability in Annuity Transactions Model Act when the 2010 version of this model law had very few changes from the previous version of the act. In addition, the information that is being obtained about the purchasers financial status, tax status, investment objectives and the like have not changed with the updating of this model law. We have long-required an exhaustive inventory of the prospective purchaser’s financial profile. And FYI- when we drafted this updated model law we actually modeled FINRA Rule 2821, not 2330.
Ninth, broker dealers have been mandated to subject indexed annuity sales to FINRA suitability rules since August of 2005 when FINRA (then known as the NASD) issued Notice to Members 05-50 (attached). This is not a new development.
Tenth, in case you hadn’t noticed, the U.S. economy took a swan dive in March of 2008. Any time there is a decline in the markets, consumers make a flight to safety and search for products that provide guarantees and a return of principal. Fixed and indexed annuities are a natural beneficiary in this periodic shift in buyer behavior. INSURANCE AGENTS DON’T NEED TO SUGGEST THAT PROSPECTIVE PURCHASERS SELL THEIR SECURITIES IN EXCHANGE FOR THESE PRODUCTS WHEN THE PURCHASER’S INVESTMENTS HAVE DECLINED IN VALUE 50% OVER A ONE-YEAR PERIOD. The decision to move is made before the insurance agent is ever invited into the equation. Thus, your premise of unregistered investment advice being doled-out ad nauseam is disingenuous. Consider your source: Joe Borg, Alabama Securities Commissioner. This is the gentleman who has led the securities industry to believe that indexed annuities are the single-most notorious vehicle used in senior fraud. Exhibit 2 (attached); in slide three of his presentation, Mr. Borg states that “34% of all cases of senior exploitation involve variable or equity-index annuities.” Note that it says “variable OR equity index annuities.” This is a nifty little way to negatively position this data; isn’t it comparable to saying that serial killers and newborn babies account for the most heinous criminal acts in the United States? For all that we know, there was ONE case involving an indexed annuity and 99 involving variable annuities. In market research, we call this “massaging the data,” Mr. Rhoades. It isn’t as difficult to make your audience perceive the data differently using such methods.
Eleventh, every financial product has, at one time or another, been the instrument of bad agent behavior. Indexed annuities are just a tool in the toolbox. Would you outlaw hammers because a serial murderer used them to plummet their victims? I would think it would be rather difficult to build a house without a hammer…in the same manner, it is not good to damn indexed annuities because you heard a story about someone behaving badly while suggesting an indexed annuity.
Twelfth, you don’t seem to understand the minimum guarantees on indexed annuities. Indexed annuities offer a guaranteed 0% floor in addition to a secondary guarantee called a Minimum Guaranteed Surrender Value (MGSV). This secondary guarantee is payable in the event the client cash surrender or the market does not perform and provides 1% -3% interest (contingent on the value of the 5-year Constant Maturity Treasury Rate) on no less than 87.5% of the premiums paid on the contract.
Thirteenth, you seem blinded on why a securities regulator would suggest that indexed annuities are in need of additional regulation. Hmmm…let me see…could it be for additional revenue and job security? In my dealings with financial services regulators, I can tell you that there have been very few that truly have the facts on indexed insurance products. This is largely due to the rampant perpetuation of misinformation on indexed annuities in the media.
If you need a reliable regulatory source, I encourage you to seek out Susan Voss or Jim Mumford at the state of Iowa Insurance Division (Susan is the Iowa commissioner and president of the NAIC, and Jim is the deputy commissioner for Iowa). Not only are these regulators credible, but 41.32% of indexed annuity sales flow through Iowa-domiciled insurance companies; for that reason they have become authorities on indexed insurance products. Please let me know if you need either Susan or Jim’s contact information and I’d be happy to provide it to you.
Fourteenth, the state securities regulators are issuing “alerts” on indexed annuities because they obtain their information on these products from an even less-credible source, FINRA. FINRA has been contacted and corrected numerous times on the inaccuracies in their Investor Alert on Indexed Annuities (see attached), which has been actively disseminated to securities regulators. This alone provides ample evidence that FINRA is not a credible source of information on indexed annuities.
Fifteenth, there has never been a product feature more miscommunicated than the concept of dividends being excluded from the crediting calculation of indexed annuities. You comment that dividends are excluded from the indexed calculation on indexed annuities as if it were a detriment, Mr. Rhoades; it is not. 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 purchaser’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. By not directly investing in the index (which would pass-on the dividends), the insurance company is protecting the purchaser from losses. So, you see- this is a benefit to the indexed annuity purchaser, not a disadvantage. And while it is true that consumers will not ‘benefit’ from dividends in an indexed annuity, they also won’t risk losing their money as a result of market volatility either. It is a win-win that many risk-averse savers find appealing.
Sixteenth, precisely 98.78% of indexed annuities offer crediting methods based on the S&P 500.
Seventeenth, not all indexed annuities offer a fixed crediting method.
Eighteenth, you have the value proposition of indexed annuities wrong, Mr. Rhoades. . Indexed annuities are not intended to provide all of the stock market’s upside. Indexed annuities are promoted as ‘allowing the purchaser to have LIMITED participation in the market’s upside, while avoiding the downside risks associated with the market.’ You see, all gains on indexed insurance products must be limited through the use of a participation rate, cap, or spread. 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. 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 the premiums paid plus interest at the end of the contract term. 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 with unlimited gains, Mr. Rhoades. I think that your readers, clients, and students would be better-served if you took note of this, as not every American is willing to tolerate market losses in exchange for the opportunity for unlimited gains.
Nineteenth, while you are quick to cite the increase in the S&P 500 index from dividends, you fail to account for the 0% floor on indexed annuities. You underestimate the annual reset of this feature, Mr. Rhoades. You shouldn’t.
Twentieth, the most common crediting methods are not as you cite (I realize you pulled this information from the NAIC Consumer’s Buyer’s Guide which is over a decade old. Fortunately, I have re-written this guide, and it will be released by the NAIC with updated information shortly.) Point-to-point and averaging methods are most common today. Annual ratchet is not a crediting method. It is merely an expression of how frequently interest is credited (annually). In addition, high water methods are only used on precisely eight products and two-year point-to-point crediting methods are only used on 17 products. So, it would be incorrect to infer that these methods are common.
Indexed annuities are simpler than you perceive; they are just fixed annuities with a different way of crediting interest. Understanding a few key features can de-mystify the crediting of interest on these indexed insurance products:
1. Which index is being used to determine the potential gain credited to the policy? The indexed annuity purchaser can choose to have their interest linked to the performance of one or more of 17 different indices (S&P 500, NASDAQ-00, etc.). Although most companies offer only the choice of the S&P 500, there are a few companies that offer more than one index selection.
2. Which crediting method is being used to calculate the indexed interest on the policy? The annuity purchaser then has their choice of one of 11 crediting methods (calculations) for their gains. Again, most companies merely offer only a simple annual point-to-point crediting method, but several companies offer more choices.
3. How frequently is potential indexed interest being credited to the policy? Crediting frequencies on indexed annuities range from one to 12 years as of 4Q2010. However, annual reset crediting strategies are available on 96.34% of all indexed annuities available today.
4. Which pricing lever is being used to limit the potential indexed interest on the policy? There are three ways in which an insurance company may limit the interest credited to these products: use of a cap, participation rate, or spread (also referred to as a margin or asset fee). All three of these pricing levers are merely a way to limit the indexed interest on an indexed insurance product; they all do the same thing. Regardless of whether the interest is limited by a cap, participation rate, or spread- all indexed annuities are priced to return the same amount.
Ultimately, the index used, the crediting method utilized, the crediting frequency, and the choice of a cap or participation rate are irrelevant. All indexed annuities are priced to return 1% – 2% greater interest than traditional annuities are earning today, over the life of the policy (regardless of index, crediting method, crediting frequency, and pricing lever). All of these different features (index, crediting method, crediting frequency, and pricing lever) merely give the marketing organizations that distribute these products an opportunity to promote why their product is “different” or “better” than their competitors’ products, to the agent. They do not actually make any one product better than another. Yes, some designs will perform better than others in some years. However, over the life of the contract, they will be about even keel.
It is worth noting that you are likely basing your perception of indexed annuity complexity on outdated information. The perceived complexity of indexed annuities stems from the historical practice of offering numerous, complex, unique crediting formulae on the products. (This was perpetuated by those distributing indexed annuities in an effort to gain greater market share.) Historically, there have been as many as 42 different ways of calculating indexed interest on these products. However, since hitting that high point in the year 2000, the number of unique crediting methods on indexed annuities has declined annually and sits at a mere 11 today. Of these eleven different methods, nine use the calculation (A-B)/B to calculate the gain.
In addition, while it is true that insurance companies reserve the right to change the caps, participation rates, and spreads on indexed annuities in years two plus, it does not mean that insurance companies do. I can name numerous companies that have never reduced their renewal rates on their indexed annuities. However, this provision is no different than that of a fixed annuity, where the insurance company has the discretion to change the credited rates in years two plus. Not to mention the fact that variable annuities have the ability to increase fees if necessary in years two plus. All fixed and indexed annuities are subject to minimum rates, as approved by the state insurance divisions that approve the products for sale in their respective states. Insurance companies are smart to protect themselves by filing products that have the ability to change rates annually, in the event of a volatile market. I personally feel much more confident that the companies offering these products today will be able to make good on their claims-paying ability, considering such flexibility in the event of unforeseen circumstances. However, it is important to remember that building-in this flexibility is not necessarily the same as utilizing it.
Twenty-first, you inappropriately refer to the spread on indexed annuities (a.k.a. asset fee or index margin) as an “administrative fee.” This would infer that the insurance company keeps the spread that is deducted from the growth in the index, prior to crediting any potential indexed gain, when in reality this value is captured by the options seller. Let me explain- the insurance company does not get to keep the gain in the index above and beyond what is credited to the client. The insurance company invests the majority of their indexed annuity budge on bonds, which cover the minimum guarantee on the product. A small percentage of that budget goes to purchase options, which provide the indexed linked interest on the annuity. The insurance company takes their [three cents of the $1] to the option seller, and asks how high of a cap or a participation rate it will allow them to offer on their particular indexed annuity crediting method (by contrast, they may ask how low of a spread they can offer). Based on market conditions, the option seller may tell them it will afford them a 9% cap for the clients (although the next week the same three cents may only purchase a cap of 7.5%). If this is the case, and the market goes up 10%, the client only gets 9%. The remaining 1% is a wash, because the option was only for 9%- the insurance does not have the ability to keep the 1% difference.
Twenty-third, very few products use more than one pricing lever to limit the potential indexed interest credited on the contract.
Twenty-fourth, your explanation of market value adjustments (MVAs) is incomplete and framed negatively. MVAs are a pricing feature that are used on all types of deferred annuities: fixed, indexed and variable alike. In fact, independent ratings firms such as A.M. Best and Standard and Poor’s encourage insurance companies to put MVAs on their annuities to protect against risk. While you are quick to point-out that an MVA can result in a reduction of the cash value, you fail to recognize that most recently hundreds of thousands of annuity purchasers were in a position to receive a POSITIVE adjustment to their cash value because of their MVA. It is of the utmost importance that you understand that an MVA only applies if more than the penalty-free amount is withdrawn on the annuity or if the contract is surrendered during the surrender charge period. Otherwise, the MVA is irrelevant. In short, if interest rates are lower at the time of withdrawal than at the time the contract was issued, the accumulation value will be increased (market value adjusted). If interest rates are higher at the time of withdrawal than at the time of issue, the accumulation value will be reduced. So, while you are quick to take notice of the negative aspect of electing an annuity with this feature, I encourage you to consider the positive: so many have benefitted from positive market value adjustments on their annuities.
Twenty-fifth, you appear to have a serious lack of journalistic integrity when you cite that indexed annuities’ surrender charges “last as long as 20 years” and “can be as high as 25%.” There is no indexed annuity available today with surrender charges over 16 years. And while there is one product with a 16-year surrender charge, there are also products with surrender charges as short as three years. However, the average surrender charge on indexed annuities as of 4Q2010 is 10 years and the average surrender penalty is just under 11% in the first year (declining annually thereafter). These surrender charges are no longer or higher than traditional fixed annuities, which are sold through the same distribution channel as indexed annuities. In fact, fixed annuities offer much higher and longer surrender charges! Variable annuities are not an accurate comparison in this regard, as they are not distributed in the same manner as fixed insurance products.
That being said, you fail to note that these higher-penalty products credit a premium bonus of as much as 10% of the premiums paid to the annuity’s value on the day it is issued (i.e. an annuity purchaser deposits $100,000 with an insurance company and immediately gets a boost in cash value to $110,000). The insurance company selling such a product must offset the risk of offering such a lucrative bonus, and provide a disincentive for the purchaser to merely obtain the increase in value from the bonus and cash surrender thereafter. That being said, if someone wants to minimize the surrender charges on their annuity contract, they should purchase an annuity without a bonus.
Notwithstanding, indexed annuities offer many options for liquidity, should the purchaser need access to their annuity’s value. Specifically, 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 that 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. This is not the picture that you would paint of them, Mr. Rhoades. Please take note of how liquid the products truly are.
Twenty-sixth, if I worked in your “firm,” I’d be scared as hell. The surrender charges on indexed annuities are clearly disclosed in a minimum-NAIC-required font size on the third page of the contract. Just like this: [insert picture of surrender charges here]
If your clients are “unaware” of these surrender charges, what will happen to Joseph Capital clients that are given securities? I hate to imagine the liability considering that the average indexed annuity contract is a mere 26.7 pages long and is required by the NAIC to be accompanied by plain-language disclosures. Contrast this to the average 200+ page prospectus used on variable annuity contracts, and I think you will agree that an indexed annuity contract is relatively simple to evaluate. While you mislead your readers into believing that indexed annuity contracts are long and/or difficult to understand, you need to not lose sight of the fact that every client needs to bear responsibility in understanding the paperwork that they sign and ask questions if they do not understand. Would you sign mortgage paperwork that you didn’t understand? A divorce decree? A vehicle loan? Likewise, an annuity is a contract and should be read prior to signing/purchase.
Twenty-seventh, you should be ashamed for suggesting that the insurance companies of this nation are largely insolvent! Since the market crashed in 2008, more than 330 banks have failed. Very, very few insurance companies did so over that same period. It is wrong of you to suggest that the negative focus on the investment units of AIG during the market collapse of 2008 are indicative of insurance company insolvency. Also consider that comparable to the Federal Deposit Insurance Corporation (FDIC), insurers have the protection of the state guaranty fund association. For updated information on the guaranty fund association and its limits, your readers can always visit www.nolhga.com.
Twenty-eighth, while your comparisons of indexed annuities and investments/call options are amusing, they are disingenuous. As I mentioned, it is inappropriate to compare risk money places, such as investments, to safe money places, such as indexed annuities. It is most appropriate to compare indexed annuities to instruments such as CDs and fixed annuities. The average 1-year CD rate is currently 0.47% (according to bankrate.com) and the average fixed annuity rate is currently 3.50%. I would say that having the potential to earn as much as 10.20% or more annually on an indexed annuity, while deferring taxes and guaranteeing lifetime income, is a VERY attractive proposition as compared to CDs and fixed annuities. Bear in mind that the investments you compare indexed annuities to cannot provide tax deferral or an income that cannot be outlived either, Mr. Rhoades. You would benefit from understanding this important aspect in product positioning.
Twenty-ninth, although the corrections that I brought to Kiplinger’s Ms. Kimberly Lankford were not nearly as exhaustive as those I have had to provide to you, the “An Annuity You Really Should Avoid” article was still incredibly inaccurate. Any judgments of indexed annuities based on this piece of fiction would be ill-formed indeed.
Thirtieth, you focus so heavily on the compensation paid on indexed annuities while it appears that you are not properly advised of them. Did you know that while indexed annuities are frequently advertised as paying double-digit commissions, there are a mere SIX indexed annuities that pay a commission of ten percent or more? Furthermore, sales of the products paying commissions from 10% – 12% accounted for precisely 0.65% of all indexed annuity sales for 4Q2010. The products that cause us the most grief in this industry account for less than 1% of total sales! In fact, the average commission paid on indexed annuities during the same period was a mere 6.37% (and even lower for annuities sold to older-aged purchasers). Keep in mind that this commission is paid one time, at point-of-sale only, and the agent services the contract for life. By comparison, securities products such as mutual funds, stocks, and bonds pay generous, consistent commissions each year. In light of this, I think you’ll agree that the commissions paid on indexed annuities are quite fair and not as lofty as you would suggest.
Thirty-first, an indexed annuity “penalty” is not “similar to a surrender charge. It IS a surrender charge.
Thirty-second, I find it hilarious that you suggest the insurer’s general account to be less safe than a separate account. While it is true that general account assets would be subject to the general claims of creditors in the unlikely event of insolvency, the annuitant would still have protection through the guaranty fund association. Compounding the insanity of your comparison is the fact that clients’ monies that are invested in separate accounts are subject to losing all of their principal and gains in the event of a market decline. (You know- like that one we just had in 2008 when savers lost nearly 50% of their retirement funds in a single year? Or was that the year 2000? What? Both you say?) Perhaps your readers, colleagues, and students should consider which is truly the bigger risk: protection from market losses coupled with guaranty fund coverage or market losses coupled with protection from creditors on the little value that may be left?
In closing, I think that one should consider that your background is in the securities business, not the insurance business. This is important for readers to know because registered representatives’ solution for ‘safety and accumulation’ is offering stocks and bonds (which are both equities products with risk of loss). By contrast, the insurance agent’s solution for the same problem is an indexed annuity (which is an insurance product with no risk of loss due to market volatility). Why isn’t the registered representative a fan of the indexed annuity? For starters, he is familiar with the processes and routines that are associated with the SEC’s regulation (which is very different than those of insurance products’ NAIC regulation). In addition, equities products pay generous, consistent commissions where annuities pay commissions only one time, at point-of sale. For this reason, it is very likely that the financial advisor does not sell indexed annuities at all. And if the registered representative is not selling indexed annuities, then he is competing against insurance agents that do. Our nation’s financial advisors and insurance agents have long-fought a battle to control 100% of their clients’ assets. It is a shame that everyone cannot learn to “play together” and ensure that the client has ALL of their financial services needs met, using THE most appropriate products for their needs, regardless of whom is able to sell it to them.
Mr. Rhoades, indexed annuities have so many good features and they are a wonderful product solution for millions. I am not suggesting that they are right for everyone. Would you just open-up to the possibility that there is more here than just “a juicy story?” You are hurting your readers and your students when you position these products in a bad light. Americans need credible and reliable information on financial services products now, more than ever. Did you know that indexed annuities have many benefits including (but not limited to):
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 indexed annuities pay the full account value to the designated beneficiaries upon death.
7. Access money when you need it: every indexed annuity allows annual penalty-free withdrawals of the account value at 10% of the annuity’s value; some even permit as much as 50% to be withdrawn in a single year. 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. Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
Indexed annuities are a viable solution to risk-averse savers who are concerned with outliving their retirement income. PLEASE be conscientious in your future commentary on financial services products, especially indexed annuities, Mr. Rhoades. There is no excuse for the perpetuation of inaccurate information in this market- I am always available to validate information. I would like to suggest that RIABiz.com consider a correction to your article. It would go a long way in restoring the credibility of RIABiz in the eyes of their readers. I would further suggest that you inquire of my firm if you have future needs for fact-checking information on indexed insurance products.
I humbly extend an offer to assist you with any of your future fact-checking needs. Thank you.
Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
IndexedAnnuityNerd.com
(515) 262-2623 office
(515) 313-5799 cell
