FIAs Are The Solution For Worst-Case Scenarios
May 7, 2014 by Linda Koco
Wealth manager Michael Fein is no stranger to variable annuities. But he has decided that he likes fixed index annuities better because “you can use them for worst-case scenarios.”
This entails going through everything in the portfolio and assessing what growth and income will look like in a worst-case scenario, using guarantees and net of expenses, said Fein, who is co-chairman and president of CIC Wealth Management, Gaithersburg, Md.
The fixed index annuity takes the position of a pension-like insurance product for this purpose, he said.
“It’s not shiny, and it’s not fancy. But it is sleep at night. If the market goes south, we have some areas to touch in retirement rather the stock position. We’ll go into the annuities, the cash value policies,” to get through until the stocks recover, he said.
Fein likes the indexed policies for another reason too, and that is simplicity.
“The variable annuities have so many moving parts, and they have so many pages in the prospectus, probably most people who sell them don’t understand them,” he said.
By comparison, fixed index annuities are only “a couple of pages.”
The equity mirror
Fein said he prefers calling the products equity indexed annuities — the term originally given to annuities that link upside interest crediting to growth of a securities index — because the term is a reminder that the product “mirrors” something of the equities market.
He is aware that the insurance industry has campaigned to change the name of the products to fixed index annuities — an action taken to underscore that the policies have a downside guarantee.
But in Fein’s view, the products are not fixed in the sense that the customer always has the ability to take back the original principal. “You have a surrender charge and expenses that could eat away at the account value.” (This would be if the surrender occurs before the end of the surrender charge period.)
Bonds and money market accounts are not fixed either, he added. “Fixed implies guaranteed, and they’re not guaranteed,” he said, citing as an example the time during the last recession when the net asset value of money markets dropped under a dollar.
The indexed products do guarantee income, he added, if sold with a guaranteed living benefits rider, which is his preference. This is what makes it a form of pension for the customer, he said. “We build that right into the plan. The customer starts income in, say, 11 years.”
In some cases, a customer might need the money earlier than that, he allowed, so “sometimes we ladder the annuities, by adding a second one which starts income earlier.”
Some clients split it between the husband and wife, he added. Some take the option to add a spousal continuation rider at time of taking income or at death.
He likes that the annuities provide options. For instance, he uses them in life to 100 scenarios. At the older ages, “all the income a person might have might be from Social Security and the equity indexed annuity — or some of the older variable annuities.”
Fein emphasized that he is not pooh-poohing today’s variable annuities. But it is today’s equity indexed annuity that he prefers using for the worst-case scenario part of a financial plan. “That’s where they fit.”
One couple, both accountants, took the worst-case-scenario thinking one step further. They had researched annuities on their own, as many consumers do today. In the process, they learned about the state guaranty funds. They asked Fein if they could buy an annuity in one state and another annuity in another state so as to maximize their state guaranty fund protection should the respective carriers collapse.
“I’m not allowed to bring up the guaranty funds with clients, but they brought it up, so I had to respond. I told them I had never thought of that, but yes, they could do that if they wish.” They did just that.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@innfeedback.com.
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[Previous] Comments
Sheryl J. Moore
5/7/2014 3:01:43 PM – Pleasant Hill, Iowa
We too would appreciate this! Our company took-up an initiative to ban the use of the word “equity” in conjunction with indexed annuities and indexed life many years ago. I have so much difficulty convincing others that our industry doesn’t use the term “equity,” when they cite that our journalists use the terminology. We appreciate all of the help we can get. Thanks to both Linda and Kim! Sheryl J. Moore President and CEO Moore Market Intelligence Wink, Inc.
Kim O’Brien
5/7/2014 2:00:05 PM – NAFA
Hi Linda…can we work on moving EIAs out of the nomenclature? Not sure if this is your article’s subject who uses, the editors or what but really only those who sell products other than indexed annuities still like to call them “equity indexed annuities” or “EIAs”. But the simple fact is that the fixed annuity industry has not used the terminology “equity” indexed annuity for many years. I can remember listening to you at the first NAIP conference I attended and know you remember those early years when indexed annuities were first introduced as equity index annuities. However, for a long time now, carriers use many different indices for indexed annuity products and the term “equity” was no longer helpful or descriptive to consumers. As the new indexed products were introduced; marketing materials, advertising and product filings (contracts, disclosures, etc.) changed the product name and information to “fixed indexed annuities” to reflect the variety of indexing choices available. Hope you can help SPREAD THE WORD!!!!
Sheryl J. Moore
5/7/2014 3:32:47 PM – Pleasant Hill, Iowa
In addition, I find it disturbing that Mr. Fein prefers to call these products “equity” indexed annuities, when use of that terminology has caused confusion with consumers in the past. He says that use of this terminology is appropriate, “because the term is a reminder that the product ‘mirrors’ something of the equities market. WHAT?!? Indexed annuities are not intended to perform anything like the equities market, much less to mirror it!I’d be surprised if a regulator reading this article didn’t decide to send Mr. Fein a little note…it is specifically because salespeople in the past were marketing indexed annuities in the manner that Mr. Fein is that we asked for a ban on the term “equity” to begin with! I would also like to add that regardless of the fact that in Mr. Fein’s view indexed annuities “are not fixed in the sense that the customer always has the ability to take back the original principal,” indexed annuities are fixed. Our regulators take that position, and so should our salespeople. Mr. Fein says, “Fixed implies guaranteed, and they’re not guaranteed.” I am sorry, but they most definitely ARE guaranteed. Indexed annuities have guaranteed minimum surrender values, guaranteed death benefits, a guaranteed floor AND guaranteed lifetime income just to name a few of these guarantees…that someone selling indexed annuities would suggest otherwise is beyond my comprehension. Sheryl J. Moore President and CEO Moore Market Intelligence Wink, Inc.