Response: Consumer Alert: Equity Index Annuities
June 7, 2010 by Sheryl J. Moore
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, “Consumer Alert: Equity Index Annuities.” As is typical with your articles and blogs, there were a number of inaccuracies in this piece. I don’t know how I could be so fortunate as to correct you on ignorant, inaccurate blogs that you have written six different times in an 11 month period. Get the facts straight, Jeffrey Voudrie. I am writing you to bring these mistakes to your attention, so that that it will not happen again in the future.
FACT #1: people cannot “invest” in an indexed annuity. Indexed annuities are insurance, they are not investments. Therefore, people who purchase indexed annuities are referred to as purchasers, consumers, buyers, etc. They are never referred to as “investors.” Investments are “risk money products” where the investors’ gains and principal investment can be lost due to market volatility. With an indexed annuity, the purchaser is always protected by a minimum floor of (at least) 0% annually, as well as a minimum guaranteed surrender value, and a guarantee of principal protection from market volatility.
FACT #2: 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.
FACT #3: there is no such thing as a “danger” in purchasing an indexed annuity. If by “danger,” you mean that purchasers should be careful of having 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 sign me up for these “dangerous” products!
FACT #4: indexed annuities are not “high-cost” products. Specifically, these products have no fees like variable annuities do. Indexed annuities DO have surrender charges, like all annuities, whether fixed, indexed, variable, or otherwise. However, the surrender charges on these products are quite reasonable and average only ten years despite the fact that the majority of the products sold have a premium bonus which immediate boosts the purchaser’s cash values (bonus products must have a longer surrender charge than a non-bonus product, in order to mitigate risk of surrender).
FACT #5: indexed annuities are not “high commission” products. The average street level commission on indexed annuities as of 1Q2010 was 6.34%. Although there are a few of products with double-digit commissions, there are also products with commissions of less than 1%. Although the double-digit commission products are the ones that you are seeing advertisements for in magazines, these seven products (yes, only SEVEN products offer a double-digit commission!) accounted for only 2% of 1Q2010 sales. So, despite the fact that these are the annuities that are getting your attention, they are not the annuities that are selling today.
I would also be remiss, Jeffrey, if I did not mention that you are comparing the one-time commission paid on indexed annuities to the consistent, generous commissions that you are paid on products such as mutual funds. I hardly think that this is a fair comparison, but the annuity compensation would be quite reasonable when compared to the total compensation you receive on such products.
FACT #6: you need to learn to source your statistics correctly. My company is the company that tracks the sales of indexed annuities, not Advantage Compendium nor my former partner, Jack Marrion. He and his company used to own the rights to this report, but I purchased the report from him years ago. In the future, you can source AnnuitySpecs.com’s Indexed Sales & Market Report. We are a Des Moines, Iowa based research consulting firm.
FACT #7: it is easy to see why you would not want any of your readers’ monies to be in indexed annuities (“I sincerely hope none of that money was yours!”), as they’d be so happy with their purchases that you wouldn’t have an opportunity to sell them something different.
FACT #8: indexed annuities are not just for those “of modest means.” Anyone who is looking for the safety of a minimum guarantee, protection of principal from market volatility, and the ability to slightly outpace fixed annuities or certificates of deposit (CDs) rates is a viable candidate for an indexed annuity. From the very, very wealthy to the very, very poor- people are choosing indexed annuities as their retirement vehicle, so that they can enjoy protection while participating in the index’s gains on a limited basis.
FACT #9: the average indexed annuity purchaser is 65 year old, not 58.
FACT #10: the average indexed annuity premium is $64,448, not $36,150.
FACT #11: specific groups of people are not “targeted” for indexed annuity sales. However, like the manufacturers of breakfast cereal, the insurance industry does market their indexed annuity products to a specific prospective group that may purchase their products. General Mills markets to children. The insurance industry markets to pre-retirees.
FACT #12: no type of annuity is an “easy sale,” particularly not indexed annuities. The insurance agent selling indexed annuities is required to perform an exhaustive suitability review before suggesting an indexed annuity product is right for their client. Thereafter, he/she must adhere to strict disclosure requirements, advertising guidelines, and other rules, in addition to completing loads of paperwork in the sales process. It is by no means an “easy sale.”
FACT #13: indexed annuities offer LIMITED interest potential, based on the performance of an index. They do not allow you “to participate in the stock market’s ‘good times’ on an unlimited basis. Indexed annuities have a minimum guarantee, and in order to provide that minimum guarantee the insurance company must limit the interest credited to the indexed annuity. (Were the interest not limited, there would be no minimum guarantee, and that is a variable annuity.) The options seller will not pass-on unlimited gains on a product that does not have unlimited risk. The three ways in which an insurance company may limit the interest credited to these products are by using 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. Regardless of whether the interest is limited by a cap, participation rate, or spread- all indexed annuities are priced to return about 1% – 2% greater interest than fixed annuities and certificates of deposit (CDs) are crediting. So, if fixed annuities are crediting 5% today, an indexed annuity sold today should earn 6% – 7% over the life of the contract. In some years, the indexed annuity will earn zero (in the event of market declines); in other years it may receive double-digit gains. What is most likely to occur on a regular basis is something in between. Indexed interest on indexed annuities sold today could be as much as 9.5% or even more.
FACT #14: as I mentioned above, it is disingenuous of you to suggest that double-digit commission indexed annuities are driving sales. Only 2% of indexed annuity sales are attributable to products with double-digit commissions.
FACT #15: Jeffrey Voudrie does not know indexed annuities. This is quite obvious from your list of “main problems of EIAs.” You’d think after the six times I’d corrected you over the past year, that something would get through to you.
FACT #16: indexed annuities have surrender charges as short as three years. Your characterization that they are only available in 7, 10, or 12-year terms is bogus.
FACT #17: indexed annuities do not “tie up your money.” All indexed annuity purchasers are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties (some even allow as much as 50% to be taken in a single year). In addition, 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 I think anyone would have difficulty implying that these products are illiquid.
FACT #18: the average first-year surrender penalty on indexed annuities as of 1Q2010 is 10.90%. Surrender charges decline annually beginning at the end of year one. This being the case, it is obvious that people do not “pay enormous surrender penalties” when accessing their monies above the penalty-free amount that is provided annually.
FACT #19: indexed annuities are backed by the claims-paying ability of the insurance company that sells them. 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. Alternatively, 251 banks have failed since the stock market collapse in March of 2008. Interestingly, the Federal Deposit Insurance Corporation (FDIC) fund has been in danger since that time. On the other hand, state guaranty fund associations (which insure the safety of insurance purchaser’s values) are not experiencing the same difficulties.
FACT #20: indexed annuities are regulated by the 50 state insurance commissioners of the United States of America. The SEC and FINRA apparently have their hands full. For example, the SEC 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 many suggest regulate indexed insurance products? These people need to rethink their 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 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, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better than insurance regulation. I suggest that the SEC and FINRA get their own houses in order before they decide to put more on their plates.
FACT #21: all indexed annuities must limit the potential indexed interest that is credited to the contract in order for the insurance company to be able to pay for the guarantees on the annuity. Indexed annuities are only intended to provide 1% – 2% greater interest crediting than traditional fixed rate instruments. Although some years an indexed annuity (IA) may receive double-digit gains, others it will receive zero. Over the life of the contract, the IA product should outpace today’s fixed annuity rates by 1% – 2%. Therefore, all indexed gains must be limited through the use of a cap, participation rate, or spread. (All three of these pricing levers serve the same purpose, in that they limit the potential indexed interest credited to the policy. Although an indexed annuity may use more than one of these levers, it is uncommon.) Were the interest on an indexed annuity unlimited, there could be no minimum guarantee and that, Mr. Voudrie, is a variable annuity.
FACT #22: caps, spreads, and participation rates all do the same thing- limit the potential indexed interest on an indexed annuity. A product with a spread is no less advantageous than a product with a cap or participation rate.
FACT #23: regardless of the crediting method, all indexed annuities are priced to return 1% – 2% greater than fixed annuities sold today. So, an annual point-to-point method is not any more or less advantageous than a monthly point-to-point method.
FACT #24: the “guaranteed rate” on indexed annuities is not comparable to a minimum guaranteed annual return on fixed annuities. Because indexed annuities offer higher upside-crediting potential than fixed annuities, the minimum guarantee is less. So, fixed annuities sold today guarantee 1% annually. Indexed annuities sold today guarantee 0% annually PLUS 1% – 3% interest on 87.5% of the premiums paid (in the event of cash surrender or non-performance of the index).
FACT #25: it is asinine for you to compare indexed annuities’ performance to the S&P 500 index. The indexed annuity purchaser is guaranteed to never receive less than zero interest (a proposition that millions of Americans invested in the S&P 500 are wishing they had during the period of 03/08 to 03/09) and will receive a return of no less than 117% worst-case scenario on the average indexed annuity. In fact, every single indexed annuity ever developed has returned at least ZERO to the client in the event of a market decline. This is a value proposition that products such as stocks and bonds cannot offer. In addition, and perhaps most importantly (for the reasons cited above), the risk tolerance of someone purchasing a “safe money product” such as an indexed annuity is not the same as someone who would invest directly in the S&P 500. It is reckless to suggest that someone interested in the benefits of an indexed annuity consider a securities investment without knowing their specific risk tolerance.
FACT #26: when the market goes up 10%, and the indexed annuity purchaser has a cap of 8%, the insurance company does not get to keep the difference of 2%. The insurance company actually purchases an option for a cap of 8% in this scenario, so there is no difference for them to keep.
FACT #27: there are several ways to mitigate interest rate risk with indexed annuities. A purchaser can ladder their annuities, or purchase indexed annuities which are strategically positioned to take advantage of a low market. An indexed annuity is specifically designed to allow the consumer to take advantage of the increases in the market, as opposed to simply “locking in at the bottom” The annual reset feature on indexed annuities uses the market’s low-point, as the next index measurement’s starting point. This provides for an awesome opportunity for indexed gains in the event that the market tanks. So in times like 03/08 – 03/09, when the market has dropped nearly 50% from a year before, indexed annuity owners are protected by zero percent interest. In addition, they have a phenomenal opportunity to benefit from the recovery of the market, even if it takes several years to correct itself.
FACT #28: you must not know many people if you cannot name one person who would “benefit from owning one.”I feel like I practically know you from correcting all of your ignorant articles, and I own MANY indexed annuities. The bottom line is that any person who is concerned about losing their principal, but wants the ability to outpace fixed annuity rates, is a likely candidate for an indexed annuity. If you would educate yourself on these products, and realize the benefits of indexed annuities, you would likely increase your client base tenfold, Jeffrey.
Please see to it that you refrain from publishing inaccurate information on indexed annuities in the future. AND, as always, I humbly extend my services should you have a need for accurate information on these products in the future.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax