Response: Why So Critical on Annuities?
December 31, 2009 by Allan Roth
PDF for Setting It Straight with CBS Money Watch
ORIGINAL ARTICLE CAN BE FOUND AT: Why So Critical on Annuities?
Allan,
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 article at CBS Money Watch, “Why So Critical on Annuities?” Although you absolutely have the right to be biased in your articles, you owe it to your readers to report accurate information. While reading this particular article, I spotted a number of inaccurate statements that I wanted to bring to your attention.
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.
Most importantly, 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.
Third, indexed annuities do not have “so called guarantees.” They HAVE explicit guarantees; numerous guarantees. For example:
1. Guaranteed preservation of principal .
2. Guaranteed minimum surrender value that provides a return of premiums paid plus interest at the end of the product term
3. Guaranteed no risk of loss as a result of market declines
4. Guaranteed minimum floor of no less than zero percent credited annually
5. Guaranteed minimum participation rates, caps, and fixed rates
6. Guaranteed maximum spreads
These guarantees are what make indexed annuities so invaluable during times of market instability. The guarantees drive the sales of these products, as demonstrated through record sales during periods of market declines.
For your information, AIG’s insurance subsidiaries have not been a problem- they have remained completely solvent despite the economy’s crisis. To become more educated on this topic, please see the National Association of Insurance Commissioner’s website at http://www.naic.org/index_aig_consumer_faq.htm.
The monies that back an indexed annuity are held in the insurance company’s general accounts, just like other fixed annuity assets. Unlike a separate pass-through account, the insurer’s general account never is at risk as a result of market declines. This is why the indexed annuity owner is never at risk when the market drops. In addition, in the unlikely event that the indexed annuity insurer became insolvent, the state guaranty fund would pay out the annuitants claims. For more information on state insurance guaranty fund associations, go to www.nolhga.com.
You obviously have had no education on indexed annuities, Mr. Roth. It is patently false to make the statement “typically [an indexed annuity] pays you a part of the market return (a very small part) with no downside risk.” Today, there are indexed annuities that have the potential to return 12.45% annually or more. However, indexed annuities are not intended to return double-digit gains on a consistent basis. Indexed annuities are a “safe money place,” and intended to compete with traditional fixed money instruments, such as fixed annuities and CDs. Indexed annuities are priced to return about 1% – 2% greater interest than traditional fixed money products. Therefore, if fixed annuities are earning 5% today, an indexed annuity should return about 6% – 7% over the life of the contract. Certainly, some years the indexed annuity will be credited with the worst case scenario of zero percent. In other years, the indexed annuity will receive double-digit gains. Ultimately, what is most likely to happen is something in between, and the return over the life of the contract will be slightly higher than a fixed annuity.
Next, a basic explanation of annuity pricing. All annuities have to be profitable to the three parties in the transaction:
1. Sales agent- through competitive commissions
2. Customer- through competitive rates
3. Insurance company- through a profit spread
4. The insurance company’s overhead, taxes, profits, and fees are all paid through the same account. The profit spread does contribute to this account. However, the insurance company also has investments which contribute to this account. In addition, one must consider that all annuities are capital-intensive products. Most insurance companies offer higher-spread products (such as life insurance), to cover the administration costs needed for items such as premium taxes and overhead. Hope that helps with your understanding of annuity pricing and asset management.
With an indexed annuity, the insurance company purchases bonds to cover the minimum guarantee, and a very small amount of their money is used to purchase options for the index-linked interest. They do not invest this money in stocks, the indexed annuity purchaser is NEVER INVESTED DIRECTLY IN THE INDEX.
Why would ANYONE ever advise someone who is risk adverse enough to seek out a fixed or indexed annuity that alternatively they should ‘invest directly in bonds and stocks?” This is not only ignorant, but it is reckless. The consumer risk profile for someone purchasing securities such as stocks and bonds is someone looking for “risk money places”- where they can have the potential to earn 20% at the cost of having a chance of losing 20%. The consumer risk profile for someone purchasing insurance products like fixed and indexed annuities is someone looking for a “safe money place”- where they can have a guaranteed preservation of principal plus limited interest.
You do your readers a great disservice with your misdirection on this issue, Mr. Roth.
Sales of indexed annuities set a record for 2Q2009 at $8.394 billion. The reason that indexed annuity sales are on the rise is because of the failing equities markets. Americans are scared to death of losing more of their retirement dollars, and looking for products that offer safety, guarantees, and a preservation of principal. Indexed annuities are a logical choice, as these products offer all of these benefits and more. Such benefits of indexed annuities include, but are 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 fixed and indexed annuities pay the full account value to your 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.
I find it laughable that you and so many other reporters keep citing the fact that indexed annuities are not backed by the Federal Deposit Insurance Corporation (FDIC). You talk about it as if that is a negative! Did you know that 81 banks have failed so far this year? Did you also know that the FDIC fund is in danger, and currently down 20% this quarter? I’d be remiss if I didn’t point out that the state guaranty fund associations are not experiencing the same difficulties. In addition, NOT A SINGLE INDEXED ANNUITY PURCHASER HAS LOST A PENNY AS A RESULT OF THE MARKET DECLINES, BANK FAILURES, OR GENERAL WEAKENING OF THE ECONOMY. Maybe that will put your comparisons of the guaranty fund association and the FDIC into perspective.
You are right- there is no such thing as a product that provides “markets returns without downside risk.” I’d like to bring to your attention that indexed annuities are not intended to return the full gain of the index, and are not marketed as such. Companies that sell indexed annuities must pay for the guarantees on the products; a costly expense. For this reason, the index linked interest on these annuities must be limited. Were it not limited, the product would have no guarantee, and THAT my friend, is a variable annuity. Millions of Americans, myself included, are quite happy for the limiting of interest on indexed annuities. At least our money has been safe from market declines- our worst case scenario is receiving zero interest crediting each year that the market drops. In addition, when the market recovers, indexed annuity clients are in a supreme position to consistently benefit from the market gains. When the market ends low, this is the new starting point for the next year’s indexed interest crediting. To reiterate, indexed annuities are a “safe money place.” They should not be compared against stocks, bonds, mutual funds, or the index itself. They compete against other “safe money places,” such as fixed annuities and certificates of deposit (CDs).
Mr. Roth, if you are looking for a “vehicle that gives [LIMITED] market returns with [NO] downside [market] risk,” an indexed annuity is the only product that can provide your retirement dollars that opportunity. If I could promise you a product where you deposit your money with an insurance company, defer taxes on the monies until you 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 your beneficiaries upon death- while providing no less than zero interest and the potential for double-digit gains- would that interest you? If so, let me know. I know a number of ethical, knowledgeable agents that would be in a supreme position to help you protect your assets. To clarify, I ACCEPT YOUR CHALLENGE.
Perhaps the reason you have yet to “convince” insurance producers is because your logic is based on false information. And for your information, I’ve made a great deal of money on the annuities that I’ve purchased. Interestingly, I received an email today from a consumer that has received 56% on his indexed annuity over the last seven years, while his no-load mutual fund lost 40%. I’d venture to say that he’s quite thankful to his “insurance producer” for suggesting a product that is supremely positioned to protect him from market risk, while providing these generous gains.
Should you have a need for unbiased and accurate information on any indexed annuity- please do not hesitate to reach out to us.
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
