Monday, December 26, 2005

Equity Indexed Annuities Under Fire---It's Not the Vehicle Stupid

There has been much controvewrsy over Equity Index Annuities as of late. But the probelm ISN'T the vehicles for the most part...It's that agents and consumers have no clue of what the intentions of these vehicles are. Let me make this very simple...

I have stated NUMBEROUS times that the equity index annuity is NOT designed to give market like returns...Nor is it designed to be a market vehicle. It is simply designed to attempt to outperform the FIXED markets by 1% or maybe a little more.

So what is the scrutiny? The problem is that many agents are selling these as market vehicles---telling the consumers they will OUTPERFORM the market and things of that nature. They either don't know or don't understand. AGAIN THAT IS NOT ITS INTENTION.

A conservative investor who would like to try to benefit from upswings in the market without getting hurt by the dwonswings may be one person who can take advantage of this vehicle. However, an investor looking for market like returns is SURE to be UPSET by this vehicle should he be in one when the market has a strong run.

I go crazy over this concept because most people just DON'T get it. And reporters are so EXCITED to write about it. The article below is written by Janathan Clements of the Wall Street Journal. The end of the article talks about how 'Over the 30 years, the equity-indexed annuity would have delivered just 5.8 percent a year, far below the 8.5 percent for the S&P 500 without dividends and the 12.2 percent for the S&P 500 with dividends reinvested.' Yes, but the equity annuity investor would have taken ZERO market risk.

People are missing the point. I am not here to defend EIA's or say they are good. But call a spade a spade for goodness sake. Understand what you are talking about...this means agents, consumers, AND REPORTERS. Here is the article in full detail. I got it from

Just see if you can now see why articles like this drive me crazy...

Getting going
Insurance firms question sales of indexed annuities
By Jonathan Clements
Wall Street Journal

One of the insurance industry’s hottest products is coming under fire – from insurance companies.

Sales of equity-indexed annuities have soared, hauling in $23 billion in 2004 and an additional $21 billion in the first nine months of this year, according to annuity tracker Advantage Compendium. These products aim to capture part of the stock market’s gain, while guaranteeing that investors will at least break even or earn a modest return. That mix of upside potential and downside protection has proven especially popular with seniors.

But even as EIAs attract a heap of assets, they have also attracted a heap of criticism for their mind-boggling complexity, potentially poor performance, the 9 percent and 10 percent commissions often paid to salesmen and surrender charges that can last for 10 years or more. Sound bad? Even insurance executives are complaining.

Equity-indexed annuities have been feeling the heat all year. In June, New Jersey limited the surrender charges on tax-deferred annuities sold within the state to 10 years or age 70, whichever is longer.

In August, the National Association of Securities Dealers recommended that broker-dealers tighten their procedures for supervising equity-indexed annuity sales by their financial advisers. Last month, the Massachusetts Securities Division filed an administrative complaint alleging that a broker-dealer failed to supervise its advisers, leading to “unsuitable sales,” including selling equity-indexed annuities with long surrender charges to seniors.

Meanwhile, there have been a spate of lawsuits claiming EIA sales abuses. In Florida alone, two class-action lawsuits and more than 40 individual lawsuits have been filed by Fort Lauderdale law firm Gordon Hargrove & James.

Of course, lawsuits and regulatory actions are nothing new for an insurance product. Instead, the big surprise has been the sniping within the usually tight-lipped insurance business. The biggest sellers of equity-indexed annuities are mostly midsize insurers. Many big, well-known companies have steered clear of the product – and their executives are often more than happy to explain why.

“These products are so complicated that I think it’s a stretch to believe that the agents, much less the clients, understand what they’ve got,” contends Rebekah Barsch, vice president of investment products at Northwestern Mutual. “The commissions are extreme. The surrender periods are too long. The complexity is way too high.”

Another major insurer, MassMutual Financial Group, has even sent a four-page analysis to its salesmen, detailing the company’s concerns. The insurer looked at how an annuity based on the Standard & Poor’s 500-stock index would have performed over the 30 years ended December 2003.

In its calculation, MassMutual assumed that annuity investors would have at least broken even in any given year and that they didn’t get any benefit from the S&P 500’s dividends – both common features with EIAs. MassMutual also assumed that the annuity had a 9.4 percent annual cap on returns. Equity-indexed annuities typically impose some limit on an investor’s annual gain.

Result? Over the 30 years, the equity-indexed annuity would have delivered just 5.8 percent a year, far below the 8.5 percent for the S&P 500 without dividends and the 12.2 percent for the S&P 500 with dividends reinvested

“There’s a high chance that you could have dissatisfied customers, and that’s not good for anyone,” says MetLife President Robert Henrikson. “We have no desire to” bring out the product.

So far, many major insurers have made the same decision. Peter Katt, a fee-only insurance adviser in Mattawan, Mich., looked at a list of the 10 insurers with the biggest equity-indexed annuity sales over the three months through Sept. 30.

“You don’t see New York Life, MassMutual, Northwestern and Guardian Life on the list,” he says. “Those are the quality companies. And they aren’t selling them.” In fact, ING Group is the only big seller of EIAs that ranks among the 20 largest U.S. life insurers based on 2004 assets, as calculated by A.M. Best.

Out-----Tony Bahu
Author of 'Annuities: The Shocking Truths Revealed'