Response: Finance Guy: Equity indexed annuity
November 1, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Finance Guy: Equity indexed annuity
Dear Mr. John Henry McDonald,
Good evening. I am the foremost authority on indexed life and indexed annuity products. I am also an independent market research analyst who specializes in the indexed insurance 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 and IUL 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 view a segment and read an article that was published at News 8 Austin, “Finance Guy: Equity Indexed Annuity.” While your efforts to provide information to your readers are to be applauded, this article was surprisingly inaccurate. Such misinformation reflects poorly on the News 8 Austin news organization, so I am contacting you, to ensure that you can make appropriate corrections to this article and have a reliable source for fact-checking in the future. Note that I have also submitted this correction to the editors at News 8 Austin, so as to avoid such inaccuracies in a public forum forthwith.
First of all, Mr. McDonald, indexed annuities have not been called “equity-indexed annuities” by those in the insurance industry 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. The insurance industry wants to make a clear distinction between these fixed insurance products and equity investments. The interest potential of these products is limited, unlike equities investments. In addition, 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. Thank you.
Secondly, I am sorry to say that you must not have read the policy that you had in your hands. Had you, you would have seen that there is no stated rate of return because indexed annuities’ returns are tied to the performance of an index, such as the Standard and Poor’s 500 index. The policy you had should have listed the limit on any potential interest that were to be earned (via a cap or participation rate). If you need assistance understanding these features, please let me know. However, the overall message that I want you to understand is that an indexed annuities’ earnings cannot be determined in advance. Most indexed annuities credit interest every year and the interest earned is determined at the end of each one-year period. Generally, if the market index declines over a one-year period, the purchaser earns zero percent interest. If the market index increases, the annuity purchaser earns interest (based on this growth), subject to a limit.
I’m also sorry to report that it appears that you did not understand the 8% guaranteed interest on the policy. The 8% is not a guaranteed annual return. The 8% guarantee is credited to a secondary account, which is only available when the purchaser decides to begin taking income payments for life; this income account value is not available upon cash surrender. This 8% rate is credited every year that the purchaser defers taking income payments from the policy, under an optional benefit known as a Guaranteed Lifetime Withdrawal Benefit (GLWB). You also misunderstood the fee on the GLWB. Although it is guaranteed to never exceed 1% annually, the current charge for the benefit is only 0.60% annually.
GLWBs provide fixed and indexed annuity purchasers with an alternative to annuitization. Annuitization is the number one benefit of purchasing an annuity: having a guaranteed income that will be provided regardless of how long the purchaser lives. And while annuitization will usually provide a greater payout over the client’s lifetime of income payments, GLWBs provide for flexibility in income payments. In fact, annuitization is often referred to as “annuicide,” simply because the annuitant cannot stop/re-start their income payments if necessary, much less change their income payment amount. Hence, the most valuable annuity benefit is rarely utilized. However, with a GLWB, the client retains all of the benefits and flexibility of the contract, while also having the option to change the income amount. In essence, annuity purchasers are paying for flexibility when they elect a GLWB on a fixed or indexed annuity.
It is important to note that not all indexed annuities offer GLWBs. These benefits are offered by 21 of 39 companies that offer indexed annuity products today. You should also note however, that only one company offers an 8% guaranteed rollup on their GLWB with a maximum 1% charge for the benefit. You grossly misrepresented this company’s products. As a top provider of indexed annuities, I believe that you owe this insurance company a correction to your article; not to mention the thousands that read your work.
Most importantly, I would like to bring your attention to the fact that indexed annuities do not have fees, Mr. McDonald. The only “fee” that may be charged on any fixed or indexed annuity would be for one of few optional benefits that are available (in addition to the base policy), such as a GLWB. Indexed annuities, in and of themselves, do not have fees. I am incredibly disturbed that you would allude that any indexed annuity could “cost a small fortune.” It takes little research on the internet to find that indexed annuities have no explicit costs. Your statements have misled the viewers and readers at News 8 Austin. A correction to this article is most definitely warranted in order to maintain your journalistic integrity in light of these comments.
The reason that the brochure in question did not mention “the rate of return that one would receive at the end of 10 years when it was time for a payout” is because the rate/amount is dependent upon several factors:
- What is the value of the income account value, at the time that income payments are elected?
- What is the age of the annuitant at the time that income is elected?
- Have withdrawals of the cash value been taken, prior to the election of income payments?
- Have withdrawals in excess of the annual penalty-free amount been taken from the cash value, prior to the election of income payments?
- Has the account value ever exceeded the income account value?
So you see, the absence of a rate was merely because of these other variables. You should find a clear explanation of these variables in the brochure that you were provided with, however. You should also know that at the time the client begins considering taking income under their GLWB, the income payment amount is quite easily made available to them. In fact, I could provide you with numerous hypothetical examples. However, the company that issues that annuity needs to protect themselves from making such hypotheticals publicly available, as they may never come to fruition if the client takes excess withdrawals, elects income early, or has poor performance on their annuity’s indexed gains, etc. etc.
I would be happy to sit-in on a teleconference with you, along with a filing reviewer from the Texas Department of Insurance, should you need. I work regularly with the National Association of Insurance Commissioners (NAIC, a regulatory organization that the Texas commissioner is a member of), when it comes to indexed insurance products; particularly indexed annuities. Should your department require a referral, I am certain that Susan Voss, the insurance commissioner of Iowa, or Jim Mumford, the Iowa Deputy Insurance Commissioner could oblige. Precisely 41.59% of all indexed annuity sales are made via Iowa-domiciled insurance companies. For this reason, I work closely with this state and these commissioners can vouch for my expertise. In the interim, you need to let your readers and viewers see a balanced perspective of indexed annuities; they have been done a great disservice with this article. What they NEED to know is that indexed annuities have 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 the designated 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.
If I can ever be of assistance to you in your efforts to fact-check similar articles in the future, please do not hesitate to reach out to me. Until then, I look forward to seeing a correction to this article.
Sheryl J. Moore
President and CEO
(515) 262-2623 office
(515) 313-5799 cell