Response: Annuities: Oversight Needed On Equity-Indexed Annuities
December 31, 2009 by Jeffrey Voudrie
PDF for Setting It Straight with Jeffrey Voudrie
ORIGINAL ARTICLE CAN BE FOUND AT: Annuities: Oversight Needed on Equity-Indexed Annuities
Jeffrey,
As you 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 recently had the occasion to read your blog, “Annuities: Oversight Needed On Equity-Indexed Annuities.” As is typical with your articles and blogs, there were a number of inaccuracies in this piece. I am writing you to bring these mistakes to your attention, so that that it will not happen again in the future.
First, 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. Your help in avoiding any such confusion is so greatly appreciated.
Second, indexed annuities are NOT investments. They are insurance products, similar to fixed annuities, term life, universal life and whole life. Stocks, bonds, mutual funds, and variable annuities are investments. Insurance products are regulated by the 50 state insurance commissioners of the United States. Investments are regulated by the Securities and Exchange Commission (SEC). 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.” Investments do not preserve principal. In the future, it would be greatly appreciated if you would make the appropriate distinction between indexed annuities, which are insurance, and investment products.
Third, as the firm that tracks the sales of indexed annuities, I can tell you with 100% certainty that there is no way that indexed annuity sales are “up 45% the first 6 months of this year.” Indexed annuity sales for 2Q2009 YTD are $15,491,980,556. This is a 22.24% increase over the same period in 2008.
Fourth, you are in no position to speculate on the suitability of these sales. There have never been stronger laws or greater practices in place to ensure the suitability of annuity sales than what we have today. In fact, indexed annuity complaints are reflective of the suitability of these sales. Based on a review of the NAIC’s Closed Complaint Database, complaints are as follows:
1. In 2007, indexed annuity complaints averaged 4.1 per company (in comparison, variable annuity complaints averaged 5.9 per company)
2. In 2008, indexed annuity complaints averaged 3.8 per company (in comparison, variable annuity complaints averaged 7.1 per company)
As you can see, not only have total indexed annuity complaints declined over the past year, but variable annuity complaints have gone up dramatically. In addition, VA complaints have always exceeded indexed annuity complaints. We certainly strive for 100% consumer satisfaction in the indexed annuity market, but I would hardly call four complaints or less reason to question the suitability of sales on these products.
Fifth, you say you are concerned that consumers are “being taken to the cleaners by agents hungry for the large commission” on indexed annuities. However, did you know that the average commission paid on indexed annuities as of 2Q2009 was only 6.46%? Considering that this commission is paid a single time and the agent is expected to serve the contract for life, I think you’d agree that this commission is quite reasonable compared to the consistent, generous commissions paid on products such as mutual funds.
Sixth, the Wall Street Journal article that you refer to in your piece was more inaccurate than your own article. Please see attached for the corrections that were made to Leslie Schism and the WSJ staff.
Seventh, you claim that indexed annuities are marketed as investments, despite the fact that they are insurance products. I’ve never heard of these products being marketed in this manner, and I’ve been working in it for more than a decade. You go further and suggest that the “sales literature” on these products also suggests that they are investments. Interesting; I’d be interested to see your evidence. In an effort to search for evidence of this claim, I did a quick review of the top three IA carriers’ indexed annuity consumer sales guides. For example:
● With [Company Name] [Product Name], you benefit from a portion of the Indices’ upside performance without the downside risks associated with investing directly in the stock market. Indexed annuity Premiums are not invested directly in the stock market or in individual stocks.
● When you buy a fixed index annuity you own an insurance contract- you are not buying shares of any index fund, any stock, or bond investments.
● When purchasing an indexed annuity, you own an annuity Contract backed by [Company Name], you are not purchasing shares of stock or indexes.
I believe it is QUITE clear that these companies promote these products as being insurance, and most definitely NOT an investment.
Eighth, these companies, agents, and sales literature make it very clear that the consumer “won’t suffer any losses” as a result of a market downturn. That is a fact. No single indexed annuity contract owner has EVER lost a penny as a result of market declines. It is always made clear, however, that any type of annuity owner may suffer a loss if they cash surrender the contract prior to the end of the product term.
Ninth, you are so hell-bent on indexed annuities being regulated as investments, and allude that this regulation is better. Please provide evidence of the supreme regulation of the Securities and Exchange Commission (SEC). This 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 you would suggest regulate an insurance product? I think you should rethink your inclinations. Indexed annuities are regulated by the 50 state insurance divisions of the United States. 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 in 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!
Tenth, you ignorance of indexed annuities is evident through statements such as “investors will benefit” from indexed annuities being “classified as investments.” How can that be so? Already, competition has been dramatically reduced since the SEC’s question of the securities status of these products arose. Since the SEC questioned the securities status of IA products with proposed Rule 151A, fifteen companies have exited the indexed annuity market, and there are eighty fewer products than there were at the time the rule was proposed. How can less options be better for consumers?
Eleventh, you say that indexed annuities being “classified as an investment will result in better disclosure of the risks involved with this product.” WHAT RISKS?!? The only risk to the client is that they may get less back than what they paid into the contract, should they decide to cash surrender the annuity before the period that they agreed on. Please clarify- what risk do you THINK that indexed annuity consumers are facing?
Twelfth, you believe that indexed annuities are “complex products.” As I’ve pointed out to you in the past, complexity is relative. Some would say that fixed annuities 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, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. My grandmother didn’t even attend college, and she fully understands indexed annuities.
Thirteenth, I’d like to you name a product where the client “won’t receive the index-related returns they thought they would” when cash surrendering before “the contract matures.” Indexed annuity maturity dates are generally set at age 100 or higher. This is because the maturity date is the latest date at which the client MUST TAKE income from the annuity. They usually have the opportunity to receive their income as early as year one, but will not be forced to take income (if they’d rather the monies accumulate) until age 100 or beyond. I’m sorry to say that there is not a single indexed annuity that meets your criteria above. If, on the other hand, you are inappropriately describing a two-tiered annuity, there is exactly ONE two-tiered annuity left in the indexed annuity market. Sales of this product accounted for less than 1.65% of total sales in the second quarter of 2009.
Fourteenth, you inaccurately speculate on the suitability review process of the indexed annuity industry. Every company selling these products has an exhaustive annuity suitability process, and forms that go along with it. Not one of these companies would approve the sale of an indexed annuity if the suitability form disclosed that “100% of a person’s investable assets” were going to be placed in the product. It is patently false for you to allude that such sales exist.
Fifteenth, I greatly do not appreciate your inference about the “high commissions” on these products. For your information, there is not ONE indexed annuity that pays a commission even close to 15%! Must I remind you that indexed annuities paid an average commission of 6.46% as of 2Q2009?
Get the FACTS right, Mr. Voudrie. If your clients knew how you repeatedly ignore the facts, and do not understand the basic concept of risk tolerance, they may have reason to question why they come to you for assistance to begin with. It would be greatly appreciated if you would refrain from publishing inaccurate information about indexed annuities in the future.
Thank you.
Sheryl J. Moore
President and CEO
LifeSpecs.com
AnnuitySpecs.com
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax
