Response: Choosing from contrasting varieties of annuities
April 4, 2011 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Choosing from contrasting varieties of annuities
Dear Ms. Baehr,
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 indexed insurance products.
I recently had the occasion to read an advice column that you authored for The Pocono Record, “Choosing from contrasting varieties of annuities.” You state in this article that you welcome questions or topic suggestions for future columns. I specifically have a couple of questions for you in light of this offer:
- Where did you do your fact-checking for the aforementioned article?
- Have you ever attended a training session or continuing education course on indexed annuities?
- Have you ever sold an indexed annuity?
- How do you think that FINRA would feel about you materially misrepresenting financial services products in a publication that is available to consumers?
I am absolutely appalled that The Pocono Record would allow you to represent them on the matter of financial services products. For that reason, I have also sent a copy of this message to their editors as well as copying their customer service area. I am deeply concerned about the many inaccurate statements you made in this article, as well as some of the advice that you doled out to The Pocono Record’s readers. It is difficult not to assume that your article is simply an opportunity to gain financial planning appointments with these readers. However, I am going to give you the benefit of the doubt that you did not maliciously and knowingly publish inaccurate information in an effort to gain the public’s business.
It would not surprise me if this newspaper’s editors were not aware of the fact that financial planners like you compete directly with insurance agents that sell indexed annuities. The general public is uninformed on financial planners’ historic efforts to control 100% of the client’s assets, regardless of the fact that an insurance product may be most what is most appropriate in addressing the client’s financial needs. After all- why would a financial planner refer the client to an insurance agent if that meant they would lose the sale? Considering this conflict of interest alone, it is inappropriate for you to purport to offer expert advice on indexed annuities.
That being said, I thought it would be prudent to reach-out to you and The Pocono Record and offer my services in regards to the misleading and inaccurate statements that you made in this article. It scares me to think that The Pocono Record’s readers may have difficulty obtaining the information they need when searching for unbiased information on annuities. An annuity not only provides a tax deferral benefit, but it is the only financial services product that can guarantee an income that the purchaser cannot outlive. Due to the not-too-distant collapse of the stock markets and our nation’s ever-extending mortality, Americans have never had a greater need for reliable and accurate information on this longevity insurance product. For this reason, I humbly offer the services of my market research firm to both you and the reputable news publication that published your piece.
One must first consider that initially there are three questions that must be answered, when looking into what type of annuity is right for them:
1. What level of market risk am I willing to assume with the annuity?
a. If more concerned about a high minimum guarantee, regardless of the lower level of interest accumulation, consider a fixed annuity.
b. If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest accumulation, consider an indexed annuity.
c. If willing to accept no minimum guarantee, and the possibility of unlimited loss in exchange for the possibility of unlimited interest accumulation, consider a variable annuity.
2. How soon will I be taking income?
a. If within the first year, consider an immediate annuity (offered in fixed, indexed, and variable types).
b. If it is further in the future, consider a deferred annuity (offered in fixed, indexed, and variable types).
3. How many premium payments will I be making?
a. If only a single payment, consider a single premium immediate annuity or a single premium deferred annuity.
b. If making more than one payment, consider a flexible premium deferred annuity.
Overall, it is important for consumers to understand that an annuity is merely a contract where an individual agrees to pay premiums to an insurance company and receives in exchange, a regular stream of income payments from the insurer- either now or at some time in the future. Annuities can be purchased with as little as a $1,000 lump sum premium, or $50 per month.
Now that the basic overview of annuities has been laid-out, I would like to directly address some of the inaccuracies in your article. First, 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.
While it is true that indexed annuities are insurance, rather than investment products, we in the insurance industry are happy for this difference. While investments do offer the opportunity for unlimited upside potential, they offer this with the caveat of possible unlimited loss of principal and gains. Indexed annuities may have limited upside potential, but are never subject to loss of gains or principal. Today, more than ever, the value proposition of zero risk of loss combined with limited market-linked gains is resounding with American savers. For this reason, indexed annuity sales have hit record levels each year since the collapse of our economy.
Furthermore, indexed annuities not being subject to SEC regulation and only requiring an insurance license of the agent selling the product is not a negative, as you would position it. Rather than being regulated by the SEC, indexed annuities are regulated by the National Association of Insurance Commissioners (NAIC). Securities licenses are not required to sell any type of fixed insurance product, so your suggestion that this is negative is preposterous. Would you suggest that a car salesman have a securities license to sell a minivan? I think you get my point, Ms. Baehr.
I find it absolutely reprehensible that you would suggest in this article “on the downside, if there is no cap, it is very possible then, to have a negative return calculation, even in a year where the market was up.” Contrary to your statements, there is absolutely NO “DOWNSIDE” on indexed annuities. The indexed annuity purchaser never receives a negative adjustment to their annuities’ value as a result of market downturn. Never. Where on earth did you do your fact-checking for this article, Erin? Did you even have access to the internet? Had you done even a single search on indexed annuities’ potential for negative interest, you would have easily identified that NOT ONE INDEXED ANNUITY PURCHASER HAS EVER LOST A PENNY AS A RESULT OF MARKET DOWNTURN. NOT ONE! All of the brochures that are provided to the purchasers of these products and the agents that sell them clearly disclose this fact. In fact, it is likely the #1 most promoted feature of indexed annuities! You embarrass yourself with such ignorant statements in a public forum, Ms. Baehr.
You have the value proposition of indexed annuities all wrong. They do not “promise to let you participate in the upside of the stock market with protection from the downside.” 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, Ms. Baehr. I think that your readers would be better-served if you took note of this, as not every American is willing to tolerate market losses in exchange for the opportunity for unlimited gains.
You further fail to understand that indexed interest on indexed annuities must be limited, or the insurer would not be able to provide a minimum guarantee on the contract. So, while you see the limitation of indexed gains as a detriment, it is actually what protects the annuity purchaser from the risk of losing money. In order to offer unlimited gains on an annuity, you must also pass-on unlimited risk. This is why variable annuity purchasers risk losing their principal in the event of a market downturn. Ultimately, if a consumer were looking for unlimited gain potential, an indexed annuity would not necessarily be an appropriate product to fulfill their needs.
On the other hand, indexed annuities’ potential for indexed interest is not nearly as limited as you would suggest in your article. Your example indexed annuity crediting calculation using a 2% annual point-to-point cap is absolutely disingenuous and far below the typical cap being offered today on these products. It is even more aggravating when you consider that indexed annuities’ annual point-to-point caps are as high as 10.20% today; this would potentially give the purchaser an opportunity to earn a double-digit gain in a single year! You inaccurately position these products as offering paltry rates and low crediting potential. Ms. Baehr, you have no basis for suggesting that indexed annuities “offer very little upside for the consumer.” Have you ever reviewed any inforce policyholder annual statements? Unlikely. Not only do I own many indexed annuities, Ms. Baehr, but I have collected policyholder annual statements over the past twelve years. Indexed annuities have consistently outperformed fixed annuities and certificates of deposit (CDs), which are the products that they are intended to compared against. On the high end of the spectrum, I have actual policyholder annual statements on my desk, showing one-year gains on indexed annuity crediting methods as high as 47.65%. Are indexed annuities intended to return this much on a consistent basis? No. However, sometimes purchasers do “hit a home run” with these products. For a more realistic review of general gains on these products, I believe that you should consider a study that was conducted by Mr. Jack Marrion. Sure, the study has its flaws (i.e. small sample size), but this “Real World Returns” study is compelling. The study looked at actual returns of inforce indexed annuities and shows that from 1997 to 2007, the five-year annualized returns for actual indexed annuities averaged 5.79%. Interestingly, this is precisely the expected return for products over this period. I find it hard to believe that anyone would shun an average return of 5.79% following a period when the market declined nearly 50% in a single year. Keeping in mind that fixed annuities are currently averaging a mere 3.50% interest, I think that this average indexed annuity return is quite respectable. Personally, one of my indexed annuities returned a gain of just over 7% this year, while my grandmother’s variable annuity had a loss. You must remember- indexed annuities are primarily purchased by those more concerned with principal protection, not unlimited potential for gains. Your assertion that consumers purchasing investments “would have had a positive return [during a period of declining markets]” is based on faulty logic: indexed annuities are not intended to perform favorably against securities products.
It never ceases to amaze me how seemingly-financial savvy people like you can so misunderstand the concept of dividends being excluded from the crediting calculation of indexed annuities. You comment that dividends are excluded from the indexed calculation on indexed annuities as if it were a detriment; it is not. 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. So, you see- this is a benefit to the indexed annuity purchaser, not a disadvantage. And while it is true that consumers will not ‘benefit’ from dividends in an indexed annuity, they also won’t risk losing their money as a result of market volatility.
I’ve never been more angry in my correction to an “advisor” running an inaccurate article on indexed annuities in their hometown paper, Ms. Baehr. You unnecessarily made some material misstatements about indexed annuities in your piece, despite the abundance of sources available to fact-check your article. Inaccurate reporting of indexed annuities is nothing new: I’ve been combating it since the products were first developed February 5, 1995. However, your article reads as if you made up your mind that “no indexed annuity is suitable for anyone” before you even drafted the piece! How can you paint an entire industry with one broad brush? Indexed annuities are not BAD. They are a valuable retirement income tool, that like any financial instrument, has at times been used in the course of bad salesperson behavior. This negative behavior has been the basis for most all negative press on these products and unfortunately has resulted in an unnecessary negative bias against the products and a plethora of articles like yours.
Perhaps for future articles, you should actually learn how indexed annuities work before you decide to influence the general public using outright misrepresentations about the product features? 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. Furthermore, I am embarrassed that an establishment as reputable as The Pocono Record 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 The Pocono Record have been done a tremendous disservice with this article. It would behoove the paper’s editors to remove this article from their website and print a correction immediately.
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. Not only can I help to ensure your journalistic integrity, but 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