Response: Index annuities are poison for your pocketbook
March 14, 2011 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Index annuities are poison for your pocketbook
The following letter was sent to Mr. Clark Howard, in response to the article above.
March 13, 2011
Consumer Action Center
Attn: Clark Howard
1601 W. Peachtree Street NE
Atlanta, Georgia 30309
Advantage Group Associates, Inc.
Sheryl J. Moore
215 SE Wildflower Court
Pleasant Hill, Iowa 50327
Re: Your article, “Index annuities are poison for your pocketbook”
Dear Mr. Howard,
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 advice column that you authored at www.ClarkHoward.com, “Index annuities are poison for your pocketbook.” I am concerned that you appear to be giving advice on indexed annuities, despite the fact that you don’t seem to have accurate information on them. It scares me to think that your readers may have difficulty obtaining the information they need, when searching for answers on indexed annuities, as you do not appear to understand how these products work at all. I wanted to reach-out to you, on behalf of your readers, to offer my services for product guidance and fact-checking. If I can ever be of assistance to you on your questions about indexed life or indexed annuity products, I humbly offer the services of my market research firm to you. In the interim, I would like to bring some items that concerned me to your attention.
First, I would like to clarify that indexed annuities 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 (collectively referred to as the National Association of Insurance Commissioners, or NAIC). 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, much less gains. The NAIC does not permit the use of the word “investment” when referring to indexed annuities, as such.
Second, I resent your statement that indexed annuities are “poison for your pocketbook.” Again, Mr. Howard, I find it premature for you to brush the indexed annuity canvas with such a broad stroke, when it appears that you are lacking factual information on these products.
Third, sales of indexed annuities actually “took off” with sales increasing steadily every year since they were developed in 1995 (until declining in 2006, at which point sales began increasing annually again after 2007). The primary reason for the steady increases in sales are consumers’ desire for retirement savings products that guarantee a return of premiums paid in addition to interest. The guarantees that indexed annuities provide, coupled with their opportunity to outpace traditional fixed money instruments (such as fixed annuities and certificates of deposit), provide an unmatched retirement income solution.
Fourth, I further resent your insinuation that those who sell indexed annuities are a bunch of crooks, preying on American savers. The vast majority of insurance agents that sell indexed annuities are good people that are doing their clients a tremendous amount of service when providing them with “safe money solutions,” such as indexed annuities. The manner in which you present these salespeople is not appreciated.
Fifth, “buying an index annuity at any age” is not “the worst thought possible.” As the owner of numerous indexed annuities, I would tell you that my indexed annuity purchases were the smartest decisions that I have ever made in regards to my retirement savings plan. Prior to making these purchases however, investing in a 401(k) was the “worst thought possible” for me. Notwithstanding, I realize the recklessness of generalizing that this product is not appropriate for anyone at age. I would hope that you too can see how poor your generalization reflects on you, given the limited, albeit inaccurate information, which you have been, provided on indexed annuities.
Sixth, although Money magazine did recently run a feature about indexed annuities, they too published a plethora of inaccurate information in their article. In fact, of all the inaccurate articles on indexed annuities that I have corrected since 2007, the Money article had the most inaccuracies in it, at a whopping 52 corrections. See a copy of my letter to the author, Lisa Gibbs, and her editors attached.
Seventh, indexed annuities do not pay “massive” commissions. Although indexed annuities are available with commissions as low as 2% and as high as 12%, sales of indexed annuity products with double-digit commissions account for less than 3% of fourth quarter, 2010 indexed annuity sales. Quite frankly, although these higher-commission products are the indexed annuities that are being advertised in trade magazines, they just don’t sell. The average commission on indexed annuities was 6.71% during the fourth quarter of 2010, and even lower for sales to older-aged annuitants. Keep in mind that this commission is paid a single time, at point-of-sale, and the insurance agent services the contract for life. By contrast, investment products such as stocks and bonds pay generous commissions on an annual basis. In light of this information, I think you’ll agree that the commissions paid on indexed annuities are hardly “massive.”
Eighth, I believe you have the value proposition of indexed annuities all wrong. Indexed annuities are marketed 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. These products are not promoted as allowing purchasers to “play the market,” as not only are gains limited on indexed annuities, but the purchaser’s money is never directly invested in the market with these products.
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 (as opposed to a fixed annuity). 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.
Ninth, indexed annuities not only DO NOT have “massive fees,” but they do not have fees at all. 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 purchaser 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 purchaser’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the purchaser 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.
Tenth, although there are indexed annuities with surrender charges of fifteen years, this is not equivalent to zero liquidity. 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, Mr. Howard. 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 commentary. Thank you so much.
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, your statements about indexed annuity complaints are inaccurate. 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 certainly is not “huge.”
Thirteenth, it is inaccurate to state that state regulators “often cannot or will not do anything to help those who were sold on false promises.” The states regulators of the NAIC hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines.
Fourteenth, it is irresponsible of you to suggest that those over 60 will find indexed annuities a “danger to [their] financial health.” Who is more in need of retirement savings products with guarantees than our nation’s seniors? Would you suggest that alternatively these seniors invest their retirement savings in products where they would have been subject to losing half of their nest eggs, such as many Americans did from March of 2008 to March of 2009? Interestingly, seniors who owned indexed annuities during this period not only didn’t lose a single penny of their savings as a result of market downturn, but they also received incredible gains once the market began its recovery in 2009.
I implore you; Mr. Clark Howard- isn’t it possible that indexed annuities are far different than you perceive them to be? Indexed annuities have so many good features and they are a wonderful product solution for millions. It would be terrific if you would open-up to the possibility that there is more here than just “a juicy story” here. You are hurting your readers when you position these products in a bad light. They need credible and reliable information on financial services products now, more than ever. Did you know that indexed annuities have many benefits including (but not limited to):
1. 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.
2. All indexed annuities return the premiums paid plus interest at the end of the annuity.
3. Ability to defer taxes: you are not taxed on annuity, until you start withdrawing income.
4. Reduce tax burden: accumulate your retirement funds now at a [35%] tax bracket, and take income at retirement within a [15%] tax bracket.
5. 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.”)
6. Provide a death benefit to heirs: all indexed annuities pay the full account value to the designated beneficiaries upon death.
7. Access money when you need it: every indexed annuity allows annual penalty-free withdrawals of the account value at 10% of the annuity’s value; some even permit as much as 50% to be withdrawn in a single year. 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.
8. Get a boost on your retirement: many 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.
9. Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
PLEASE be conscientious in your future reporting of financial services products, especially indexed annuities, Mr. Howard. There is no excuse for the perpetuation of inaccurate information in this market- I am always available to validate information for anyone searching for facts on indexed insurance products. If you should ever have a need for information on indexed insurance products, I humbly extend an offer to assist you with your fact-checking needs. Thank you.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell