We would love to hear from you. Click on the ‘Contact Us’ link to the right and choose your favorite way to reach-out!

wscdsdc

media/speaking contact

Jamie Johnson

business contact

Victoria Peterson

Contact Us

855.ask.wink

Close [x]
pattern

Industry News

Categories

  • Industry Articles (17,774)
  • Industry Conferences (3)
  • Industry Job Openings (3)
  • Moore on the Market (207)
  • Negative Media (139)
  • Positive Media (73)
  • Sheryl's Articles (656)
  • Wink's Articles (265)
  • Wink's Inside Story (238)
  • Wink's Press Releases (99)
  • Blog Archives

  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • August 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • November 2008
  • May 2008
  • February 2008
  • August 2006
  • Indexed Annuity Magic: How Do They Do It?

    September 7, 2011 by Sheryl J. Moore

    By Sheryl J. Moore
    AnnuityNews.com

    One of the greatest mysteries in the indexed annuity market is how insurance companies are able to offer market-linked gains on an annuity with a principal protection feature. Many are familiar with the strong guarantees that fixed annuities offer, but it comes at the cost of low potential for gains. On the other hand, variable annuities provide unlimited potential for gains, but you must be willing to stomach unlimited risk to achieve it.

    The indexed annuity is a unique gem amidst a pebble-lined beach – but how is this awesome feat accomplished? How can insurance companies offer purchasers market-linked interest without the risks associates with VAs and still afford to offer a guarantee? It is actually pretty amazing and extraordinarily simple to accomplish.

    For comparison, let’s explore what the insurer does with the purchaser’s money when offering fixed annuities. When an annuity purchaser makes a premium payment into a fixed annuity, the insurance company turns around and uses that premium to purchase bonds. Generally, the bonds are high quality and they mature at the same time the surrender charges expire on the purchaser’s annuity (i.e. I buy a 10-year surrender charge annuity and the insurance company then purchases 10-year Grade “A” bonds to cover my annuity’s guarantees). This provides a relatively safe investment vehicle for the insurer to make enough interest off of in order to earn their spread/profit.

    So, just for simplicity’s sake, let’s make the assumption that the bonds are paying 4 percent interest and the insurance company is crediting 3 percent interest on its fixed annuities. This means that the difference of 1 percent is what the insurance company is using to cover its expenses and anything that is left is its spread/profit. Makes sense, right?

    OK, let’s move over and apply this to indexed annuities: instead of putting 100 percent of the purchaser’s premium payment in bonds, with an indexed annuity, the insurance company puts about 97 percent of the premium payment in bonds. (Some companies might use 96 percent, 98 percent, etc. of the premium payment; you get the idea!) The bond covers the indexed annuity’s annual 0 percent floor, which protects the annuity purchaser from market losses. It also covers the minimum guaranteed surrender value, providing a return of premium plus interest to the beneficiaries in the event of death, in addition to providing the same benefit to the purchaser if the indexed crediting does not perform.

    Now, let’s get to the other 3 percent of the purchaser’s premium payment, where the real magic happens: this portion of the purchaser’s premium payment is used to purchase options. It is the options that provide the index-linked interest on indexed annuity contracts. Today, we might take that three cents of our one dollar to the options-seller and ask that he sell us an option for the S&P 500, using an annual point-to-point crediting method with a cap being used to limit the indexed interest. The option-seller might tell us that our three cents will buy our customers a cap of 3.85 percent which isn’t so hot. Then again, the S&P 500 is relatively low right now.

    However, if the market suddenly goes back up, and the S&P 500 returns to 1500 the next month, that option-seller will likely offer a much higher cap for our three cents. (After all, if it is already at 1500, what is the likelihood that the S&P 500 will increase tremendously over a one-year period?)

    So there you have it, folks. No tarot cards, no voodoo dolls – just plain and simple math. And even though the logic behind indexed annuities is rather simple, it is magical nonetheless.

    Sheryl Moore is president and CEO of AnnuitySpecs.com and LifeSpecs.com, indexed product resources in Des Moines. She has more than a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sheryl.moore@annuityspecs.com.

    © Entire contents copyright 2011 by InsuranceNewsNet.com, Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

    Originally Posted at AnnuityNews on September 7. 2011 by Sheryl J. Moore.

    Categories: Sheryl's Articles
    currency