Response: @theMarket: Back to the Future
July 9, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: @theMarket: Back to the Future
Dear Mr. Bill Schmick,
I am an independent market research analyst who specializes exclusively in the indexed annuity 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 a blog that was published at www.iberkshires.com, “@theMarket: Back to the Future.” I had some concerns with your piece because it had several inaccurate and misleading statements about indexed annuities in it. 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 and foremost, 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, it appears that you are ignorant of actual facts regarding so-called “deceptive marketing” of indexed annuities. I’m sorry to tell you that the facts do not support your accusation that these products are sold by the “unscrupulous.” 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 Securities and Exchange Commission) 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 “deceptive” sales practices.
Third, insurance agents that sell indexed annuities do not “collect lucrative commissions.” The average indexed annuity commission as of 2Q2010 is 6.35%. Although there are a total of seven products in the entire indexed annuity market that pay a double-digit commission (and those products account for a mere 2% of total indexed annuity sales), there are also products that pay commissions as low as 0.50%. It would also be disingenuous for you to compare the commissions paid on an annuity with other products’ commissions, as annuity commissions are paid one time, at point-of-sale. Compare this with the consistent, generous commissions that are paid on products such as mutual funds, and I think that you’ll agree that indexed annuity commissions are quite modest.
Fourth, indexed annuities do not “tie up large sums” of money for “long periods of time.” All annuities have surrender charges whether fixed, indexed, or variable. The average surrender charge for indexed annuities as of 2Q2010 is ten years. However, there are indexed annuities with surrender charges as short as three years. In addition, EVERY indexed annuity permits penalty-free withdrawals of 10% of the annuity’s value annually. Some even allow as much as 50% of the annuity’s value to be withdrawn in a single year. PLUS, 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 that you’ll see that consumers have tremendous access to their cash value when they purchase indexed annuities. These are some of the most liquid retirement income products available today!
If more people understood what surrender charges do for the purchaser, they would appreciate them. The surrender charge on a fixed, indexed, or variable annuity is a promise by the consumer not to withdraw 100% of their monies prior to the end of the surrender charge period. This allows the insurance company to make an informed decision on which conservative investments to use to make a return on the clients’ premium (i.e. 7-year grade “A” bonds for a seven-year surrender charge annuity or 10-year grade “A” bonds for a ten-year surrender charge annuity). Investing the consumer’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the consumer on their annuity each year. In turn, it also protects the insurance company from a “run on the money” and allows them to maintain their ratings and financial strength. I personally appreciate the value of the surrender charge on an annuity and if more consumers understood them, they would too.
Furthermore, the average first-year surrender penalty on indexed annuities is 10.61%. This penalty declines annually. I would hardly call 10% a “hefty surrender fee.”
Fifth, you judge the indexed annuity for being the “subject of countless lawsuits,” but do you follow-suit with your opinions of whole life? What about universal life? Indexed annuities have not been the subject of lawsuits any more than any other financial services instrument. The fact is that class actions lawyers make big money and members of class actions barely make out even. The big payoff is a huge motivator for litigators hoping to line their pockets. Interestingly, despite a staggering lack of wrongdoing in the indexed annuity industry, the insurance companies marketing these products have settled past class action lawsuits quickly to avoid negative publicity. It is cheaper to pay and get your name out of the press than to stay the course and stand firm on your cause. Class action lawsuits in this industry have been less prevalent than other insurance product class actions such as “vanishing premiums” on whole life and underfunded UL contracts. For the FACTS on class action lawsuits in the insurance industry, I encourage you to read my article at http://www.sheryljmoore.com/2010/01/ambulance-chasers-and-a-lack-of-responsibility/.
Sixth, had the Securities and Exchange Commission (SEC) been giving the authority to regulated FIXED indexed annuity products, things may be much different. Now that you mention it, the SEC (who is responsible for the regulation of investments) has their hands full with the products that they are already regulating at the time that they proposed regulating indexed annuities. 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 you would suggest regulate indexed insurance products? I think you need to rethink their inclinations, Mr. Schmick. 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.
I encourage you to pull this blog off of your website. I am certain that FINRA would appreciate you disseminating accurate commentary on your website. I am also confident that your readers would find you much more credible if your articles were precise. Please let me know if I can ever be of assistance to you in your endeavors to ensure the accuracy of the information you distribute on indexed annuities. I am always more than happy to help others understand indexed insurance products.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax