Response: Equity-index annuities entangle, jilt investors
March 9, 2011 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Equity-index annuities entagle, jilt investors
Dear Mr. Hopkins,
I am an independent market research analyst who specializes in the indexed annuity and 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 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 read an article that you authored for Chattanooga Times Free Press, “Equity-index annuities entangle, jilt investors.” This article was inaccurate to the point it makes a mockery of the Chattanooga Times Free Press. Such misinformation reflects poorly on the paper, so I am contacting both you and the paper’s editors, to ensure that they can make appropriate corrections to this article. I am also reaching-out so that you can have a reliable source for fact-checking in the future.
First, I would like to draw to your attention that indexed annuities are not new. They have existed since February 5, 1995.
Second, I would like you to know that it is inappropriate to refer to these products as “equity indexed annuities” or “EIAs.” 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. This 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.
Third, I resent that you say indexed annuities are a “nefarious innovation.” You obviously do not understand the products well-enough to comment on them.
Fourth, indexed annuities are not “costly,” as they have no explicit “fees,” like variable annuities do. The “cost” that the client pays on an indexed annuity is merely time; via a surrender charge. 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.
Fifth, indexed annuities are not “complex,” as you perceive them to be. They are merely fixed annuities with a different way of crediting interest. Furthermore, complexity is relative. Some would say that fixed annuities, which are the simplest retirement income product offered by insurance companies, are complex. However, if someone can understand that they have 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 they can understand nearly every indexed annuity sold today. As far as the indexed interest crediting is concerned, 98.4% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. My grandmother didn’t even attend college, and she understands indexed annuities for goodness sake.
Note that the perceived complexity of indexed annuities stems from the historical practice of offering numerous, complex, unique crediting formulae on the products. Historically, there have been as many as 42 different ways of calculating indexed interest on these products. However, since hitting that high point in the year 2000, the number of unique crediting methods on indexed annuities has declined annually and sits at 12 today. Of these twelve different methods, nine use the calculation (A-B)/B to calculate the gain.
Sixth, indexed annuities are most definitely not “illiquid.” 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 that these products pay the full account value to the beneficiary upon death, and it is clear that these are some of the most liquid retirement income products available today. This is not the picture that you would paint of them, Chris. I ask you to please take note of how liquid the products truly are and don’t let them be promoted in a manner contrary to this in your articles. Thank you so much.
Seventh, all annuities- fixed, indexed, variable or otherwise- provide “guaranteed retirement income.” In fact, an annuity is the only financial product in the world that can provide an income that the purchaser cannot outlive. Indexed annuities specifically provide this option through both annuitization and guaranteed lifetime withdrawal benefit payments.
Eighth, the guaranteed principal protection and minimum guarantees that are provided by indexed annuities, along with the opportunity to earn gains based on the performance of an index (such as the S&P 500), are NOT “too good to be true.” Every single indexed annuity provides these features, which are unmatched by any other single financial services product.
Ninth, you misunderstand the minimum guarantee on indexed annuities. Comparable to fixed annuities, indexed annuities offer a minimum annual floor; where this floor is typically 1% on fixed annuities, it is 0% or greater on all indexed annuities. Indexed annuities also have a secondary guaranteed, called a ‘minimum guaranteed surrender value,’ (MGSV) which provides a benefit in the event the purchaser decides to cash surrender, or in the event that the index does not perform. This MGSV credits 1% – 3% interest on no less than 87.5% of the premiums paid on the contract. Keep in mind that in exchange for the lesser minimum guarantee (as opposed to a fixed annuity), the indexed annuity offers the potential for greater gains.
Tenth, you inaccurately believe that the limiting of indexed interest on indexed annuities is a detriment, when it is not. Indexed annuities are promoted as ‘allowing the purchaser to have LIMITED participation in the market’s upside, while avoiding the downside risks associated with the market.’ You see, all gains on indexed insurance products must be limited through the use of a participation rate, cap, or spread. Perhaps it would help if I first started with a brief overview of how indexed insurance products work? Because indexed annuities are a “safe money place,” they should be compared against other safe money places. Investment products such as stocks, bonds, mutual funds, and variable annuities subject the purchaser to both the highs and the lows of the market. It is inappropriate to compare any safe money place, such as an indexed annuity, to risk money places and it is most certainly not appropriate to compare safe money places to the market index itself. Indexed annuities are not intended to perform comparably to stocks, bonds, or the S&P 500 because they provide a minimum guarantee where investments do not. Indexed annuities are priced to return about 1% – 2% greater interest than traditional fixed annuities are crediting. In exchange for this greater potential, the indexed annuity has a slightly lesser minimum guarantee. So, if fixed annuities are earning 5% today, indexed annuities sold today should earn 6% – 7% over the life of the contract. Some years, the indexed annuity may return a double-digit gain and other years it may return zero interest. However, what is most likely to happen is something in between. Were the indexed interest NOT limited, the insurer could not afford to offer a minimum guarantee on the product, and THAT is a variable annuity- not an indexed annuity. On the other hand, the client is guaranteed to never receive less than zero interest (a proposition that millions of Americans are wishing they had during that 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 addition, no indexed annuity owner has ever lost a penny as a result of market downturn. This is a strong value proposition that cannot be offered by any securities product with unlimited gains, much less via the S&P 500.
Eleventh, while it is true that insurance companies reserve the right to change the caps, participation rates, and asset fees on indexed annuities in years two plus, it does not mean that insurance companies do. I can name numerous companies that have never reduced their renewal rates on their indexed annuities. However, this provision is no different than that of a fixed annuity, where the insurance company has the discretion to change the credited rates in years two plus. Not to mention the fact that variable annuities have the ability to increase fees if necessary in years two plus. All fixed and indexed annuities are subject to minimum rates, as approved by the state insurance divisions that approve the products for sale in their respective states. Insurance companies are smart to protect themselves by filing products that have the ability to change rates annually, in the event of a volatile market. I personally feel much more confident that the companies offering these products today will be able to make good on their claims-paying ability, considering such flexibility in the event of unforeseen circumstances.
Twelfth, there is not one single indexed annuity that has “administrative fees,” much less “hefty administrative fees.” Merely suggesting such gives the impression that one is quite ignorant of these products.
Thirteenth, no indexed annuity provides reinvested dividends; and dividends being excluded from the indexed calculation on indexed annuities is not a detriment. The insurance company never receives the benefit of the dividends on the index on an indexed annuity, because the client is never directly invested in the index. The insurance company invests the indexed annuity purchaser’s premium payment in the general account, which protects them from declines in the index. The premiums are never invested in a pass-through account, which would provide the benefit of the dividends, but also expose the client to risk should the market decline. For this reason, the dividends cannot be passed on to the consumer. By not directly investing in the index (which would pass-on the dividends), the insurance company is protecting the purchaser from losses. This is a benefit to the indexed annuity purchaser, not a disadvantage. And while it is true that annuity purchasers will not “benefit” from dividends in an indexed annuity, they also won’t risk losing their money as a result of market volatility.
Fourteenth, every single indexed annuity pays a guaranteed death benefit that is no less than the full account value or GMSV to the designated beneficiaries on death- FOR NO FEE! This provision is a standard provision on all indexed annuity contracts. Some indexed annuities even provide enhanced death benefits that pay more than this amount on death. Please- get educated on these products before you decide to write about them in a public forum.
Fifteenth, the regulatory regime of the SEC is not supreme to the regulation provided by the National Association of Insurance Commissioners (NAIC). Let me enlighten you with an overview of financial products’ regulation. Investments (products where consumers risk the loss of principal AND gains) such as stocks, bonds, and mutual funds are regulated by the SEC and the Financial Industry Regulatory Authority (FINRA). Indexed annuities are fixed insurance products; similar to fixed annuities and whole life insurance. These fixed insurance products never put the purchaser’s principal or gains at risk due to market volatility. Indexed annuities, like other fixed insurance products, are regulated by the 50 state insurance commissioners of the United States. Together, they form the NAIC.
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.
Most that perceive insurance regulation to be lacking have an inappropriate frame-of-reference. They see that the SEC regulates products such as variable annuities, and in these transactions the NAIC is responsible for the insurance company’s solvency. Therefore, they assume that with insurance products, there is no regulation- only a regulator ensuring company solvency. They do not understand that with non-registered products, the NAIC performs the same functions that FINRA and the SEC do on the securities side: market conduct regulation, suitability enforcement, etc. If more people understood the state regulatory structure, such a misconception would not persist.
Sixteenth, you must remember that while the “guarantees [of annuities] are only as good as the issuing insurance company,” the State Guaranty Fund Association protects annuitants in a manner similar to how the FDIC protects bank customers.
Seventeenth, it is inappropriate to refer to fixed and indexed annuity purchasers as “investors,” as these products are not investments. Variable annuities are the only type of annuity that can be called an “investment,” as these products place the purchaser’s principal and gains at risk due to market volatility. Stocks, bonds, and mutual funds are also investments. The Securities and Exchange Commission (SEC) is responsible for the regulation of such investment products. Fixed and indexed annuities, by contrast, are insurance products- similar to term life, universal life and whole life. Insurance products are regulated by the 50 state insurance commissioners of the United States. Insurance products do not put the client’s money at risk, they are “safe money products” which preserve principal and gains. Investments, by contrast, can put a client’s money at risk and are therefore appropriately classified as “risk money products;” they do not preserve principal. The NAIC does not permit the use of the word “investor” when referring to indexed annuity purchasers, as such.
Eighteenth, most annuity purchasers realize the premium bonus on their contract on the day the annuity is issued. For you to suggest otherwise is reckless.
Nineteenth, there is no such thing as an indexed annuity with a surrender charge anywhere NEAR 20 years. Again, your ignorance on this subject is lacking and your lack of fact-checking is mind-boggling.
It is disappointing and downright frightening that someone with so little knowledge on indexed annuities would be permitted to write about them in a public forum. I fear for the future retirement of your clients given your lack of knowledge on retirement income products, quite frankly. Furthermore, I am embarrassed that an establishment as prestigious and upstanding as the Chattanooga Times Free Press would permit you to publish such a blatantly inaccurate article. Now, more than ever, Americans need reliable, credible information on financial services products. The readers of Chattanooga Times Free Press have been done a tremendous disservice with this article.
Please, in the future, should you have a need to verify information on indexed annuities, or perform fact-checking for your commentary, feel free to reach out to us. I am always more than happy to assist others in their understanding of 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