Equity Indexed Annuities: Are they the real deal or junk products?

[Norwayguy]

Non-indexed (declared-rate) deferred annuities seem likely to produce stronger long-term results than indexed, if the index is the only difference. FIA must divert some of the premium to purchase hedges against the stock index, which cannot be converted to credited interest. If the commissions are the same or higher, that also weakens the FIA product as compared with declared-rate S/FPDA.

But some people are attracted to the allure of stock index growth. If that gets them to put more money aside toward their future, that offsets the potential disadvantage of diverted dollars. Most save too little, including me.

This is an almost identical post to one you did on IULs

 

[scagnt83]

This is an almost identical post to one you did on IULs

And its just as misinformed as the one he did on IULs.
It is not the full picture, especially the IUL post.

 

[JMO Fan]

And its just as misinformed as the one he did on IULs.
It is not the full picture, especially the IUL post.

I have managed the product development of UL and annuities. My analysis of the financial foundation of these products is fundamental, actuarial, and investment-specific. I thought we were talking about potential product performance, not sales hype.

What aspect do you consider "misinformed"?
- - - - - - - - - - - - - - - - - -

This is an almost identical post to one you did on IULs

I'm glad you read both. Did you get the point?

 

[iceco1d]

Non-indexed (declared-rate) deferred annuities seem likely to produce stronger long-term results than indexed, if the index is the only difference. FIA must divert some of the premium to purchase hedges against the stock index, which cannot be converted to credited interest. If the commissions are the same or higher, that also weakens the FIA product as compared with declared-rate S/FPDA.

But some people are attracted to the allure of stock index growth. If that gets them to put more money aside toward their future, that offsets the potential disadvantage of diverted dollars. Most save too little, including me.

That's not true. The money diverted to creating indexed interest is not to hedge. It's basically to speculate and create additional interest income.

The bonds held in the general account are the "hedge."

 

[scagnt83]

FIA must divert some of the premium to purchase hedges against the stock index, which cannot be converted to credited interest. If the commissions are the same or higher, that also weakens the FIA product as compared with declared-rate S/FPDA.

This is what I dont agree with.

Yes, the IA does not have as much to go towards guaranteed interest, but the whole point is that the portion going to the options has the ability to perform better than if it had went to Guaranteed Interest Crediting. It is just dependent upon the chosen Index.

You speak as if the client is doomed to never receive any Indexed Crediting, which is false.

- - - - - - - - - - - - - - - - - -

Non-indexed (declared-rate) deferred annuities seem likely to produce stronger long-term results than indexed, if the index is the only difference.

This part I actually agree with (for IAs, not IULs), BUT, only because of current market conditions.

Currently, you can get a 10 year FA at 4.25%. There is no 10 year IA that I know of that has a 4.25% cap.

So yes, in this current (artificial) economic environment FAs often look more attractive than IAs if an Income Rider is not warranted.

But historically IAs have given the opportunity for growth a bit above a FA.

 

[iceco1d]

But what are the chances over the next 10 years that FIA contracts issued today won't see their caps move over 4.25%?

 

[0b1kanobee]

But what are the chances over the next 10 years that FIA contracts issued today won't see their caps move over 4.25%?

I would rephrase the question as "what are the chances over the next 10 years that FIA contracts issued today WILL see their caps move over 4.25%?"

I'm assuming you are referring to in-force contracts.

So if I go take out a 10 year FIA today and the cap is 4.25%, I doubt that the cap would ever go much higher than that. In fact it could go lower which would offset any slight increase the cap may have in the future.

I think I'm just saying what you already know. But anyway, every fair and honest annuity carrier I have spoken to has flat out told me off the record that if I think that my cap today is 4.25% (example) and that in 4 or 5 years that cap may be 6% then I'm in for a BIG SHOCK. Not something you want to even remotely say to your client to get their hopes up.

Better to sell safety and tax deferral.

I'm putting very few people in long term annuities right now unless there is a rider for income involved or unless it works for them. Going to shorter terms till we see how this plays out with a mix of securities type investments thrown in (usually).

Pretty disapointed to see GA just change their income rider. Oh well........roll with the changes.

ML has dropped every VA with the exception of their 7 year. Won't be long till PRU gets rid of their daily lock-in from what I hear. Hartford has exited all together.

 

[JMO Fan]

That's not true. The money diverted to creating indexed interest is not to hedge. It's basically to speculate and create additional interest income.

The bonds held in the general account are the "hedge."

"Speculation" is not permitted in general account products, including FIAs, so only foolish carriers would try it. Investments backing FIAs are the same as those for SPDAs. Derivatives (stock index hedges) purchased with part of the FIA premium take away from the amount available for those investments.

 

[iceco1d]

"Speculation" is not permitted in general account products, including FIAs, so only foolish carriers would try it. Investments backing FIAs are the same as those for SPDAs. Derivatives (stock index hedges) purchased with part of the FIA premium take away from the amount available for those investments.

You're wrong. A hedge is used to reduce exposure to risk.

For example, buying AAPL stock at $550, and then buying put options with a strike of $525 is a HEDGE. Hedging reduces, but doesn't eliminate, risk.

That is not what FIA companies are doing when they design an EIA contract. They investing whatever amount is necessary in BONDS to provide a) agent commissions, b) guaranteed minimum interest rate, and c) cover insurer expenses and leave them some profit.

Whatever amount is left over after completing those functions, is invested into purchasing call options on an equity index. The options are purchased "naked." They are not married puts, or covered calls. They are purely naked calls, that will increase drastically in value if the market in question goes UP and expires WORTHLESS if the market in question stays the same, or goes down. It is a speculative play to see if the contract is credited with additional (indexed) interest.

It is absolutely not a hedge.

 

[bluemarlin08]

So do the companies purchase one year call option or the length of the annuity call options. Do they repurchase options every year, if so, how do they reserve the amount needed to purchase future calls?