Response: COLUMN: Financial reform: The good, the bad, the ugly
July 13, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: COLUMN: Financial reform: The good, the bad, the ugly
Dear Mr. Livingston,
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 in The Walton Sun, “Financial reform: The good, the bad, the ugly.” 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.
First of all, 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 should not be registered as securities. The SEC previously defined insurance products in Safe Harbor Rule 151 as:
- A product that is regulated by a state insurance commissioner/division.
- A product where the risk is borne to the insurance company, not the purchaser.
- A product that is not marketed primarily as an investment.
Indexed annuities meet this definition and have since their introduction in February of 1995.
Third, your description of indexed annuities is disingenuous. An indexed annuity is 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. The client is never directly invested in the index or the market with indexed annuities, but interest is merely based on the performance of an external index.
Fourth, the average surrender charge on indexed annuities as of 1Q2010 is 10.61%. This is a far cry from the 15% that you throw out.
Fifth, I’d be interested to see the data that supports your statement that “nothing, nada is more abused than equity-indexed annuities.” Quite honestly, it sounds like you are spouting-off about something you are little educated on. In reality, the data does not support your statement. See data below from the National Association of Insurance Commissioner’s Closed Complaint Database on annuities:
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 these indexed annuities declined annually for the past three years, but the average has declined consistently for the past four years. Conversely, variable annuity complaints (which are overseen by the SEC) 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, but I would contend that an average of only 3.29 complaints annually, per company, is quite reasonable and not indicative of “abusive” sales practices.
Sixth, the Securities and Exchange Commission (SEC) deemed that “registration was appropriate” because they needed to increase their fees and job security. Let’s remember that the SEC (who is responsible for the regulation of investments) had their hands very full with the products that they are already regulating at the time that they first proposed regulating indexed annuities. Specifically, 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 you would suggest regulate indexed insurance products? I think you need to rethink their inclinations, Mr. Livingston. I believe it would be prudent for the SEC and FINRA get their own houses in order before they decide to put more regulation on their plates.
Seventh, I’ve got a newsflash for you. Insurance company VPs generally do not oversee the compliance and market conduct of the products that they sell. These are the people you need to talk to, if you want the facts on any suspicions you may have about these products. Fortunately, the data I have provided you on the low complaint levels should waken you to the fact that indexed annuities are not what you perceive them to be.
The insurance industry has done a very good job of imposing strict regulations to ensure proper market conduct, suitability, product development, and sales practices in this industry. The currently regulatory structure that indexed annuities operate under is very thorough and effective. 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, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better than insurance regulation.
You fail to realize that indexed annuities are a valuable retirement tool for Americans. They offer many benefits (including, but not limited to):
- 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.
- All indexed annuities return the premiums paid plus interest at the end of the annuity.
- Ability to defer taxes: you are not taxed on annuity, until you start withdrawing income.
- Reduce tax burden: accumulate your retirement funds now at a [35%] tax bracket, and take income at retirement within a [15%] tax bracket.
- 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.”)
- Provide a death benefit to heirs: all fixed and indexed annuities pay the full account value to your beneficiaries upon death.
- 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.
- 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.
- Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
I would suggest that in the future you do much more fact-checking on your articles before you decide to distribute them publicly. In order to ensure your journalistic integrity, I am happy to serve as a resource for you in the future, should you ever have a need for factual information on indexed insurance products. In the interim, I would suggest a correction to this piece.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax