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  • Response: Looking for Protection

    April 4, 2011 by Sheryl J. Moore

    PDF for Setting it Straight with Alan Levine

    ORIGINAL ARTICLE CAN BE FOUND AT: Looking for Protection

    Dear Mr. Lavine,

    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. In addition, my company has served as the benchmark for indexed annuity sales data and statistics for many years. Years ago, I purchased the sales survey that was previously conducted by (my former partner) Jack Marrion. He began tracking the sales of indexed insurance products long before any other market research firm. It also helps that I have long tracked the product information and rates for every indexed annuity on the market. Based on the breadth of information available to me on the indexed annuity market, I am strongly positioned to assist you in any questions you may have on these products, Mr. Lavine.

    I recently had the occasion to read an article that you authored for Financial Advisor, “Looking for Protection.” Some of the misleading statements that were made in this article concerned me; there was also more than one inaccurate statement made about indexed annuities in the piece. I can see that you care a great deal about educating your readers and I appreciate your efforts to educate them on indexed annuities. Because I am certain that you do not want to mislead your readers, and I know that Financial Advisor would not knowingly publish inaccurate information in the articles that they distribute, I thought I should offer some assistance. I am reaching out to support you, so that you can have access to accurate information on indexed insurance products for your future fact-checking needs.

    I can confirm that sales of these products have indeed hit record levels over the past couple of years. Total 2010 sales were $32.3 billion and indexed annuities accounted for four out of ten fixed annuity sales at the close of the year. However, it is not true that 91% of indexed annuities were “sold by independent broker-dealers.” Perhaps there is some miscommunication on the statistic that you are citing, but independent insurance agents accounted for 87.1% of all indexed annuity sales in the fourth quarter of 2010. Broker dealer sales of indexed annuities are far eclipsed by sales via third-party marketing organizations that appoint independent insurance agents.

    Furthermore, anyone speculating that indexed annuity sales are on the rise due to guaranteed lifetime withdrawal benefits (GLWBs) and premium bonuses may be removed from this market. Indexed annuity GLWBs have existed since June of 2006, and yet indexed annuity sales are 28.4% greater than 2007 levels. In addition, premium bonuses have never been lower on these products (since they first declined in 2008) and yet sales are up nearly 21% over that periods’ sales. Further consider that GLWB rollups and indexed annuity premium bonuses have been comparatively low since 2008 because of capital constraints and the low interest rates that have been plaguing annuity underwriters. This fact alone would defy the logic that the recent momentum in indexed annuity sales is attributable to these product features. Ultimately, Joe Montminy of LIMRA is correct in his assessment that indexed annuity sales are on the rise because of the volatility in the equity markets coupled with low credited rates on fixed annuities and CDs.

    Mr. Lavine, what many fail to take into consideration is that the 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 may 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 the appropriate product to fulfill their accumulation needs.

    However, those interested in knowing more about indexed annuities should be well-informed on their value proposition. Unfortunately, I feel that this proposition is different than what you seem to communicate in your article. Indexed annuities are not intended to provide all of the stock market’s upside. 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. 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 the premiums paid plus interest at the end of the contract term. 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, Mr. Lavine. 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.

    Furthermore, I would like to ensure that you properly understand the guarantees on indexed annuities. There is no indexed annuity that offers a guaranteed floor of 1% today, nor has there been for some time. Indexed annuities offer a guaranteed 0% floor in addition to a secondary guarantee called a Minimum Guaranteed Surrender Value (MGSV). This secondary guarantee is payable in the event the client cash surrender or the market does not perform and provides 1% -3% interest (contingent on the value of the 5-year Constant Maturity Treasury Rate) on no less than 87.5% of the premiums paid on the contract.

    And 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. When you think about it, 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. However, it is important to remember that building-in this flexibility is not necessarily the same as utilizing it.

    There is no indexed annuity available today that does not compound the indexed interest accumulation in the account value. Not one.

    I would like to suggest that it may be more prudent for Mr. VanderPal to propose that if annuitants are interested in an indexed annuity with a term end point crediting method (which he referred to as term point-to-point) that they consider diversify their premiums among more than just this crediting strategy. It is somewhat disingenuous to suggest avoiding these designs altogether, as they often offer the potential for greater indexed interest crediting. One must also consider that there are numerous types of annual reset crediting strategies (which credit interest annually and don’t present the opportunity to get zero gains over the entire contract term). Many of these annual reset methods are often available on the same indexed annuities offering term end point crediting strategies. It is also worth considering that most term end point methods have an averaging component at the beginning and/or end of the indexed calculation, so that a dramatic decline in the index on the first/last day of the term would not be as great of a concern in this scenario.

    I also wanted your readers to have a heads up that less than ten indexed annuities offer crediting strategies that utilize a high water mark component. The most common indexed annuity crediting strategies today are:

    –          Annual point-to-point

    –          Monthly averaging

    –          Daily averaging

    –          Monthly point-to-point

    –          Term end point

    All of these crediting strategies calculate the indexed interest using a simple (A-B)/B formula.

    Interestingly, there has never been a product feature more miscommunicated than 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, Mr. Lavine; 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 either. It is a win-win that many risk-averse savers find appealing.

    I was concerned that there was more focus on painting the indexed annuity as an illiquid retirement vehicle in your article than there was about highlighting the many liquidity options. I do appreciate that you mentioned the liquidity provisions in the section citing Mr. VanderPal. However, the overall tone on the product’s liquidity was negative. While you are quick to note that indexed annuity surrender charges can exceed ten years, you fail to note that they may be as short as three years. Furthermore, readers need to understand that the annuity’s surrender charge only applies if the annuitant withdraws more than 10% of their annuity’s value each year. (Some indexed annuities even allow as much as 50% of the annuity’s value to be withdrawn in a single year!) EVERY SINGLE INDEXED ANNUITY AVAILABLE TODAY ALLOWS FOR THIS 10% ANNUAL PENALTY-FREE WITHDRAWAL PROVISION. They must also must consider that 93.4% of the indexed annuities available today 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. Lastly, all indexed annuities pay the full account value to the beneficiary upon death; this makes it clear that indexed annuities are some of the most liquid retirement income products available today. This is not the picture you would paint of indexed annuities though, Mr. Lavine. Isn’t it possible that indexed annuities are truly different than you and your sources perceive them to be?

    I did want to bring to your attention that you were inaccurate in stating that “most state guaranty associations cover up to $100,000 of a fixed annuity in the event the insurance company goes belly-up.” The state guaranty fund association coverage limit was raised to $250,000 on January 1, 2010, which is prior to the date that the Federal Deposit Insurance Corporation (FDIC) permanently raised their coverage limits to $250,000. This is very important to consider, given that financial stability of financial services institutes is of greater concern to Americans today, than it has been in the past. For updated information on the guaranty fund association and its limits, readers can always visit www.nolhga.com.

    And while David Maurice may avoid recommending indexed annuities because he perceives them to be complex, it is worth noting that he is likely basing this perception of complexity on outdated information. The perceived complexity of indexed annuities stems from the historical practice of offering numerous, complex, unique crediting formulae on the products. (This was perpetuated by those distributing indexed annuities in an effort to gain greater market share.) 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 a mere 11 today. Of these eleven different methods, nine use the calculation (A-B)/B to calculate the gain. Quite simply, indexed annuities are nothing more than fixed annuities with a different way of crediting interest.

    And while Mr. Maurice may think that he can “get better returns with less risk by diversifying clients in a wide range of asset classes over the long term,” he fails to grasp that the individual purchasing an indexed annuity is likely too risk averse to make equities products a suitable investment purchase. His recommendation is not only ignorant, but it is reckless. The consumer risk profile for someone purchasing securities such as stocks and bonds is someone looking for “risk money places”- where they can have the potential to earn 20% at the cost of having a chance of losing 20%. The consumer risk profile for someone purchasing insurance products like fixed and indexed annuities is someone looking for a “safe money place”- where they can have a guaranteed preservation of principal plus limited interest. Indexed annuity purchasers are more concerned with the return OF their money than the return ON their money. I’m certain the clients of Financial Advisor readers would GREATLY appreciate this difference be taken into consideration in their education on these products.

    In closing, I think that one should consider that your background is in the securities business, not the insurance business. This is important for readers to know because registered representatives’ solution for ‘safety and accumulation’ is offering stocks and bonds (which are both equities products with risk of loss). By contrast, the insurance agent’s solution for the same problem is an indexed annuity (which is an insurance product with no risk of loss due to market volatility). Why isn’t the registered representative a fan of the indexed annuity? For starters, he is familiar with the processes and routines that are associated with the SEC’s regulation (which is very different than those of insurance products’ NAIC regulation). In addition, equities products pay generous, consistent commissions where annuities pay commissions only one time, at point-of sale. For this reason, it is very likely that the financial advisor does not sell indexed annuities at all. And if the registered representative is not selling indexed annuities, then he is competing against insurance agents that do. Our nation’s financial advisors and insurance agents have long-fought a battle to control 100% of their clients’ assets. It is a shame that everyone cannot learn to “play together” and ensure that the client has ALL of their financial services needs met, using THE most appropriate products for their needs, regardless of whom is able to sell it to them.

    I truly appreciate the opportunity to bring this information to your attention, Mr. Lavine. I welcome the opportunity to serve as a resource to you. I hope for the sake of your readers that note will be taken of the misstatements and generalizations above.

    Please let me know if I can be of assistance to you in the future, should you have any need for fact-checking or resources on indexed insurance products.

    Thank you.

    Sheryl J. Moore

    President and CEO



    Advantage Group Associates, Inc.

    (515) 262-2623 office

    (515) 313-5799 cell

    (515) 266-4689 fax

    Originally Posted on April 3, 2011 by Sheryl J. Moore.

    Categories: Negative Media