Response: Annuities Entice Risk-Averse Investors
June 15, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Annuities Entice Risk-Averse Investors
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 am contacting you, as the author of an article that was published at TheStreet.com, “Annuities Entice Risk-Averse Investors.” This article had several inaccurate and misleading statements about annuities in it. I know that there were not made intentionally. I am contacting you in response to these inaccuracies to ensure that you and your readers have accurate, unbiased information on these products in the future.
I appreciate your desire to communicate the benefits of annuities to your readers. However, not all annuities are “expensive and complicated.” Variable annuities, which are described in your article, are just one of several types of annuity products. Perhaps it would be helpful if I provided a basic foundation for your understanding of annuity products.
What is a deferred annuity?
An insurance product whereby at least a year will elapse between when the lump sum or series of premium(s) are paid, and the annuity is transitioned into stream of income through annuitization. Deferred annuities can be fixed, indexed, or variable in nature.
What is an immediate annuity?
An insurance product whereby a lump sum premium is paid and the annuity is transitioned into stream of income through annuitization within one year from the date of purchase. Immediate annuities can be fixed, indexed, or variable in nature.
Deferred annuities typically are used as vehicles for accumulation, or building additional interest until the annuitant is ready to transition the annuity to a series of payments through annuitization. Alternatively, an immediate annuity is often used as a vehicle for individuals who are ready for their income stream, well, immediately.
Both deferred and immediate annuities can have their interest credited based on several external factors. The two basic types of deferred and immediate annuities are fixed and variable. Of the fixed variety, there are (traditional) fixed, as well as indexed.
Annuity Risk Spectrum
|Guaranteed Interest||Upside Potential||Indexed Participation||Client’s Risk Tolerance|
|Typically 2%||Very Limited: typically less than 5.50%||None||Low|
|Indexed||Typically 87.5% of premium @ 3%||Limited: typically capped at less than 9.00%||Gains based on performance of external index||Moderate|
|Variable||Fixed account only||Unlimited||Gains based directly on fund performance||High|
What is a Fixed Annuity (FA)?
A contract issued by an insurance company that guarantees a minimum interest rate with a stated rate of excess interest credited, which is determined by the performance of the insurer’s general account. A Fixed Annuity is considered a low risk/low return annuity product.
What is an Indexed Annuity (IA)?
A contract issued by an insurance company that has a minimum guarantee where crediting of any excess interest is determined by the performance of an external index, such as the Standard and Poor’s 500® index. An Indexed Annuity is considered a moderate risk/moderate return annuity product.
What is a Variable Annuity (VA)?
A contract issued by an insurance company where crediting of any interest is determined by the performance of underlying investment choices that the annuity owner selects. A Variable Annuity is considered a high risk/high return annuity product.
There are three basic questions that must be asked, when considering the purchase of an annuity:
1. What level of market risk am I willing to assume with the annuity?
a. If more concerned about a high minimum guarantee, regardless of the lower level of interest accumulation, consider a fixed annuity.
b. If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest accumulation, consider an indexed annuity.
c. If willing to accept no minimum guarantee, in exchange for the possibility of unlimited interest accumulation, consider a variable annuity.
2. How soon will I be taking income?
a. If within the first year, consider an immediate annuity (offered in fixed, indexed, and variable types).
b. If it is further in the future, consider a deferred annuity (offered in fixed, indexed, and variable types).
3. How many premium payments will I be making?
a. If only a single payment, consider a single premium immediate annuity or a single premium deferred annuity.
b. If making more than one payment, consider a flexible premium deferred annuity.
In light of this information, perhaps you can see how very different fixed, indexed, and variable annuities are. Fixed and indexed annuities in particular are quite simple as compared to variable annuities.
I also wanted to bring to your attention that variable annuities (VAs) do not have minimum guarantees. There are optional living benefit riders that may be added to a variable annuity (usually for fee, which may exceed 1.00% annually), in order to offset some of the risks of owning these investment products which do not preserve principal. For example, a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider can be added to a variable annuity to guarantee principal protection, and ensure that the annuitant is able to withdrawal [6%] of their annuity’s value annually, for life (even if the annuity’s value is reduced to nothing). Fixed and indexed annuities by contrast have minimum guarantees and a return of principal which are included in the contract at no charge to the client.
Any annuity can “provide guaranteed annual payments,” once it is annuitized. This is a process where the value of the annuity is essentially used as a single purchase payment for an income annuity (or what you call a lifetime annuity) and the client is thereafter guaranteed payments for life. Although annuitization typically provides higher payouts than taking structured withdrawals from the annuity, it is also inflexible. With this option, the annuitant cannot change the amount of the income payments once they begin. A GLWB is sometime used as an alternative to annuitization in fixed and indexed annuities.
Only fixed and indexed annuities can protect their purchasers from losses due to market volatility. Variable annuity purchasers are subject to losing gains and principal, should market losses occur.
If “markets are miserable for a decade,” the “asset value” of a VA would not remain at $100,000. Variable annuity assets decline with reductions in the corresponding stocks/bonds/funds that the purchaser is invested in. However, a VA with a GLWB would still give the purchaser the ability to receive “at least $12,000 a year,” despite market losses (because of the GLWB, not a minimum guarantee). However, most GLWBs will not provide for payment that “increase each year,” they merely provide for annual withdrawals of [6%] annually.
Despite what Norbert Mindel says in his quotes, annuities are not “expensive insurance products.” Relative to other insurance products, annuities are very reasonable. In fact, fixed and indexed annuities do not have any explicit fees that the purchaser must pay.
People who want to ensure that they have protection from market losses, want the guaranteed lifetime income of annuities, and want the ability to outpace traditional fixed money instruments should consider indexed annuities. Indexed annuities provide 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 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.
9. Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
If an annuity purchaser decides to add a GLWB to any annuity, fixed, indexed, or otherwise, they can be guaranteed to withdraw [6%] a year to cover living expenses and also be guaranteed that they can continue to receive the income payments regardless if their assets are exhausted.
I truly appreciate your desire to provide information about the benefits to annuities to your readers. If it could be clarified that this article is merely about variable annuities, it would be greatly appreciated. Should you have a need for accurate, detailed information on annuities in the future, please do not hesitate to contact my firm.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax