Equity Indexed Annuities: Are they the real deal or junk products?Go to Top
Okay, my company is critical of equity indexed annuities, saying they feel they are "too risky". They seem to be a great product on the surface, with a person being able to get a substantial portion of market gain most years and a guaranteed that ain't that far off what the fixed annuities offer. I actually wonder how the companies offer them and stay in business. An NASD article implied that there could be issues of insurer solvency down the road, but is that legit or does the NASD just want to get its regulating hands on them?
Good point, I really don't understand how variable annuities are regulated but not Equity Indexed annuities I really wish someone could shed some light on that for me.
I am not 100% sure on this but, the insurance company doesn't actually invest the money in the S&P, NASDAQ, or DOW. So on the years were the contract only makes like 5% the insurance company actually gets alot more. Even if they don't meet the cap the insurance company still makes money.
A person once told me that insurance companies make 20% on thier money. The NASD definetly wants to regulate it, but the truth is, thier is absolutely no risk. Its a FIXED product. When people buy spia's and die in the lifetime payout option the company makes a crap load, maybe that a way they make up for it. They definetly dont lose.
I really don't understand how variable annuities are regulated but not Equity Indexed annuities I really wish someone could shed some light on that for me.
The argument that is made (by others) is, that variable annuities are invested in prospectus products, and the decision as to which mutual fund, or group of stocks to invest in, needs to be regulated, whereas indexed annuities are only linked to the various indices, but there is no individual stock or mutual fund picking.
Okay, my company is critical of equity indexed annuities, saying they feel they are "too risky". They seem to be a great product on the surface, with a person being able to get a substantial portion of market gain most years and a guaranteed that ain't that far off what the fixed annuities offer. I actually wonder how the companies offer them and stay in business. An NASD article implied that there could be issues of insurer solvency down the road, but is that legit or does the NASD just want to get its regulating hands on them?
Thoughts please.
Index Annuities are a good product for the right situation and for the right percentage of a portfolio. There is no one size fits all. And I wouldn;t want to see someone put their entire nest egg into an IA. When running historic numbers, I think it's safe to say that an IA should average somewhere in the 4%-6% return range. Generally better than a traditional fixed annuity or CD, but will likely underperform the equity markets over any 10-year period.
As far as how the companies make money on these products, it's fairly simple. There are 3 basic "buckets" where these dollars go. First and foremost, the carrier will take the cost of paying administrative expenses (including commissions and the companies profit) out of the money. Next they have a required amount they must set aside to meet the guarantees of the contract. And lastly, they use what's left to purchase options on whichever index the IA uses for it's crediting method.
So, if $1 is invested, the company may take out $0.05 to cover the admin charges, commissions, etc. They may need to set aside $0.90 to cover the guarantees. Then they'll take the last $0.05 and purchase options on the index. Regardless of what the market does, the company already has it's profit. If the market goes up, they exercise the options and apply the interest to the contract. If the market goes down, the option expires worthless. Keep in mind, this is a simplistic explanation.
When you see a company offering a big bonus or a higher than usual participation rate, it's usually made up for somewhere else. Like in the guarantee or a longer surrender period. Some plans have a guarantee of 2% interest on 87.5% of the amount invested, but may have a higher participation rate or cap. While others, like ING, have a plan that has a guarantee of 3% interest on 100% of the money, but has a lower participation rate. One isn't necessarily better than the other. I'm of the opinion that the guarantees will likely never come into play. But people like guarantees.
As for the NASD involvment, I believe there are a couple of reasons. Number one, I think the NASD member firms (i.e. - broker dealers) have been seeing large amounts of money leaving to go to IA's. So they've put pressure on the NASD to try and get these products regulated just as equity products are. Secondly, many agents have abused IA's and taken advantage of people while offering poor advice. I have mixed emotions about the NASD getting involved. I don't really mind there being a requirement to have a securities license to offer an IA (although an IA is a fixed annuity and has a guarantee return - you can't say the same about equities). But I really don;t like the idea of having to run it through the broker dealer and taking a cut on commissions. Not all BD's require this (not yet anyway).
There's a great website where you can plug in the parameters of an IA (such as crediting method, bonus, aprticipation rates, caps, etc) and get historic results. This assumes, of course, that the IA would have had the same parameters for the entire length of the contract. But it gives you a general idea of which IA's might be better than others over the long haul. The website is www.annuitymarketing.com. You will have to register to be able to use the calculator. But you can use any alias and email address you like to do so. If you are an analytical person, you'll have fun running the different hypotheticals for many different contracts from many carriers.
Hey chumps I have an idea after each opinion you can come on with the thumbs up or the thumbs down symbol lol maybe that would be like a loop-hole besides I need some advice on weather to get in this field or not
Hey chumps I have an idea after each opinion you can come on with the thumbs up or the thumbs down symbol lol maybe that would be like a loop-hole besides I need some advice on weather to get in this field or not
We'll have to get the Board to add an icon with thumbs!!!
I'm sorry thought I saw thumbs on here oncemaybe u could use the little thumb up symbol in the post icons section for good and the think that is spinning for the thumb down
I am not 100% sure on this but, the insurance company doesn't actually invest the money in the S&P, NASDAQ, or DOW. So on the years were the contract only makes like 5% the insurance company actually gets alot more. Even if they don't meet the cap the insurance company still makes money.
A person once told me that insurance companies make 20% on thier money. The NASD definetly wants to regulate it, but the truth is, thier is absolutely no risk. Its a FIXED product. When people buy spia's and die in the lifetime payout option the company makes a crap load, maybe that a way they make up for it. They definetly dont lose.
SPIAs definitely have to be quite a money-maker for the companies, I would think. It would take years until they're actually paying out beyond the single premium that was put in, in most cases.
Index Annuities are a good product for the right situation and for the right percentage of a portfolio. There is no one size fits all. And I wouldn;t want to see someone put their entire nest egg into an IA. When running historic numbers, I think it's safe to say that an IA should average somewhere in the 4%-6% return range. Generally better than a traditional fixed annuity or CD, but will likely underperform the equity markets over any 10-year period.
As far as how the companies make money on these products, it's fairly simple. There are 3 basic "buckets" where these dollars go. First and foremost, the carrier will take the cost of paying administrative expenses (including commissions and the companies profit) out of the money. Next they have a required amount they must set aside to meet the guarantees of the contract. And lastly, they use what's left to purchase options on whichever index the IA uses for it's crediting method.
So, if $1 is invested, the company may take out $0.05 to cover the admin charges, commissions, etc. They may need to set aside $0.90 to cover the guarantees. Then they'll take the last $0.05 and purchase options on the index. Regardless of what the market does, the company already has it's profit. If the market goes up, they exercise the options and apply the interest to the contract. If the market goes down, the option expires worthless. Keep in mind, this is a simplistic explanation.
When you see a company offering a big bonus or a higher than usual participation rate, it's usually made up for somewhere else. Like in the guarantee or a longer surrender period. Some plans have a guarantee of 2% interest on 87.5% of the amount invested, but may have a higher participation rate or cap. While others, like ING, have a plan that has a guarantee of 3% interest on 100% of the money, but has a lower participation rate. One isn't necessarily better than the other. I'm of the opinion that the guarantees will likely never come into play. But people like guarantees.
As for the NASD involvment, I believe there are a couple of reasons. Number one, I think the NASD member firms (i.e. - broker dealers) have been seeing large amounts of money leaving to go to IA's. So they've put pressure on the NASD to try and get these products regulated just as equity products are. Secondly, many agents have abused IA's and taken advantage of people while offering poor advice. I have mixed emotions about the NASD getting involved. I don't really mind there being a requirement to have a securities license to offer an IA (although an IA is a fixed annuity and has a guarantee return - you can't say the same about equities). But I really don;t like the idea of having to run it through the broker dealer and taking a cut on commissions. Not all BD's require this (not yet anyway).
There's a great website where you can plug in the parameters of an IA (such as crediting method, bonus, aprticipation rates, caps, etc) and get historic results. This assumes, of course, that the IA would have had the same parameters for the entire length of the contract. But it gives you a general idea of which IA's might be better than others over the long haul. The website is www.annuitymarketing.com. You will have to register to be able to use the calculator. But you can use any alias and email address you like to do so. If you are an analytical person, you'll have fun running the different hypotheticals for many different contracts from many carriers.
Very nice explanation of the basic concept. Thanks for the info.
I appreciate this discussion , it is exactly what I've been trying to figure out, annuities confuse me and I have a degree in finance,how am I going to explain them to a 70 year old retired rough neck?
Hey, my first post on this board, and I'm coming in wanting things....
I have the same problem, being securities licensed prevents me from having discussions 'in the open' about investments.
Any chance we could have a closed forum on the board that only those that are securities licensed could participate in? It would be wonderful to have a place to be able to 'chat' about securities related issues with the handcuffs a bit looser....
Here's why they're not "registered products." It's idiotic. The fees to agents are enourmous compared to other fixed products. The sales charge is onerous. The only guy I know who's selling these is using leads from Cold Solutions ( see my other thread) getting 80 year olds to sign up and kicking back cash because his commission is so high he can afford that.
Other than that I know no one who is selling these - if you do some Googling you'll see the actual amounts sold are not that high, they just garner alot of space.
I saw that Charles Schwab was selling them and when I spoke to an agent he immediatly tried talking me out of buying one!! Why they are selling them in the first place I have no idea but that's true story.
From an LSW article, "insurance products are exempt from registration as securities under Section 3(a)8 of the 1933 Securities Act which defines insurance products as "any insurance or endowment policy or annuity contract or optional annuity contract issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions of any state or territory of the U.S." Rule 151 was adopted in 1986 as a safe harbor definition The annuity contract must be issued by an corporation- the insurance company- which is subject to the supervision of the state insurance commissioner, banking commissioner or any agency or officer performing similar functions in any state
Equity Indexed Annuities: Are they the real deal or junk products?
maybe u could use the little thumb up symbol in the post icons section for good and the think that is spinning for the thumb down
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