Response: Too much confusion about annuities and fixed index annuities
April 11, 2011 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Too much confusion about annuities and fixed index annuities
Mr. Bill Robbins,
I am an independent market research analyst who specializes exclusively in the indexed annuity and indexed 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 exclusively on indexed products. I do not endorse any company or financial product, and millions look to us for accurate, factual 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 am contacting you, as the author of a blog posting that was recently made on your site, www.rwadvisors.com. The blog was entitled, “Too much confusion about annuities and fixed index annuities” and was posted on the site on 03/29/11. This blog was quite inaccurate, so I thought it important to reach-out to you. So that I can ensure that you and your readers have accurate information on these products, I’d like to bring each of your inaccurate statements in the blog to your attention.
First, fixed and indexed annuities don’t have prospectuses. Securities products which have the potential for loss of gains and principal are sold via a prospectus. Indexed annuities are insurance products that guarantee a return of principal plus interest, and are therefore sold via an insurance contract. Consider: the average indexed annuity contract is a mere 26.7 pages long and is required by the NAIC to be accompanied by plain-language disclosures. Prospectuses by contrast average 200+ pages! Most purchasers don’t even read their prospectus! In light of this, I think we can both agree that an indexed annuity contract is comparatively simple to evaluate, as compared to a securities products’ prospectus.
Second, it is misleading of you to suggest that insurance companies issuing indexed annuities “subtract a number of years from [the purchaser’s] actual age” when calculating the annuitization rates. Not only do a mere 2% of purchasers annuitize, but the back-dating practice is common to variable annuity issuers, not indexed annuity issuers. In fact, in my 13 years of reviewing over 1,000 indexed annuity specimens, I have never seen a reference to this practice in one indexed annuity contract. Not one.
Third, indexed annuities do not offer Guaranteed Minimum Income Benefits, or GMIBs. A GMIB is an optional benefit that is offered on variable annuities, in order to provide a “safe money” element to a “risk money” product; via a guarantee that the purchaser will never receive less than the premiums paid (and possibly more) in the event that they annuitize. This type of feature is not only unavailable on indexed annuities, but not necessary. Every indexed annuity provides no less than the premiums paid plus interest and no purchaser of any indexed annuity has ever lost a penny as a result of market downturn. For these reasons, GMIBs are not necessary on indexed annuities.
Fourth, it was frightening to read your suggestions that a purchaser could lose value in an indexed annuity as a result of market downturn. Even a simple Yahoo! search on indexed annuities yields hundreds of thousands of results mentioning the products’ principal protection feature. It truly appears as if you are confused about the difference between variable annuities (a security) and indexed annuities (an insurance contract). Most all of your blog makes references to variable annuity riders and options. I suggest that you make immediate corrections to the blog in order to maintain your credibility as a financial services expert, Mr. Robbins.
Fifth, indexed annuities have no explicit charges or fees. Again, it sounds like you are confused. Not all annuities have “fees” the way that deferred variable annuities do. Income annuities as well as fixed and indexed deferred annuities specifically have no explicit fees. The “charge” that the client pays on a fixed or 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. While there are some fixed or indexed annuities that have an optional feature (that the purchaser can choose to add-on to the base contract) that is offered in exchange for an annual fee, indexed annuities do not have fees in and of themselves.
Sixth, while you are quick to point-out that these annuities have surrender charges, you fail to explain their many options for 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. Robbins. Please take note of how liquid the products truly are.
I certainly appreciate your efforts to educate Americans on financial services products, Mr. Robbins. However, I must encourage you to seek out credible sources of information if you intend to write about indexed annuities in the future. I would personally be thrilled to serve as a fact-checking resource for you. The readers of your blog and your potential clients need credible and accurate information on financial services products, now more than ever. However inadvertently, you have done your readers a great disservice in this regard. I hope that you are thoughtful enough to see that your readers’ best-interests are not best-served by such inaccurate information. Please make a correction to this blog, for your readers’ sakes, and should you ever have a need for a fact-checking source in the future, I humbly extend my services.
Sheryl J. Moore
President and CEO
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