Wharton Financial Institutions Center Personal Finance: Real World Index Annuity Returns

Wharton Financial Institutions Center
Wharton Financial Institutions Center
Personal Finance
Real World Index Annuity Returns
Jack Marrion*
indexannuity@mail.com
Geoffrey VanderPal**
drvanderpal@gmail.com
David F. Babbel***
Babbel@Wharton.UPenn..edu
October 5, 2009

Abstract

• We offer the first empirical exploration of fixed indexed annuity returns based upon actual
contracts that were sold and actual interest that was credited.

• Annuity returns have been competitive with alternative portfolios of stocks and bonds.

• Their design has limited the downside returns associated with declining markets.

• They have achieved respectable returns in more robust equity markets.

• Studies that have criticized FIAs are typically based on hypothesized crediting rate formulae,
constant participation rates and caps, and unrealistic simulations of stock market and interest
rate behavior. When actual policy data are used, the conclusions change.

• Our study is exploratory, because although it is based on actual contracts and actual crediting
rates, our policy data set is neither randomly selected nor comprehensive.

Keywords: Indexed annuities, retirement, optimal asset allocation
JEL classifications: G11, G22, G23, J26
* MBA, doctoral candidate in the area of cognitive bias in decision-making, President of Advantage Compendium.
** DBA, MBA, CFP®, CLU, CFS, RFC®, CTP, CAMS, Chief Investment Officer of Skyline Capital Management.
*** Professor of Insurance and Finance, The Wharton School of Business, University of Pennsylvania; Senior Advisor
to Charles River Associates; Fellow of Wharton Financial Institutions Center.
Wharton Financial Institutions Center 1
Real World Index Annuity Returns
Jack Marrion, Geoffrey VanderPal, David F. Babbel

Introduction

Financial advisors and financial planners have sought various programs to provide clients protection
from systematic risk, also known as market risk. Various asset allocation strategies have
been used with limited success when extreme market movements and “black swans” occur
(Taleb, 2007). It has been known for close to 50 years that equity market returns do not conform
to a Guassian, or Normal distribution (Mandelbrot, 1963; Fama, 1963).i Rather, probability distributions
of market returns are typically skewed and leptokurtic (fat-tailed). When these leptokurtic
events occur on the positive side of the distribution, clients are delighted, but the opposite
is true when these events occur on the negative end of the two-tailed distribution.

Principal preservation products have evolved to address the needs of many risk-averse consumers
by providing them a safety net for their investment/savings capital. The products are structured
in a way that reduces correlations with other asset classes. To illustrate better the extremes
of market returns, we can examine the Russell 3000 index that accounts for nearly 98% of the
publicly traded U.S. equity market. A study by Eric Crittenden and Cole Wilcox (2008) at Blackstar
Funds was conducted using Russell 3000 data from 1983 through 2006. The findings were
that “about 40% of the stocks had negative returns over their lifetime, and about 20% of stocks
lost nearly all of their value. A little more than 10% of stocks recorded huge wins over 500%”
(Richardson, 2009). These data indicate that most of the positive market return over time comes
from relatively few performers, which lends support to the use of stock index strategies as part of
an overall portfolio. Furthermore it supports the notion that there is significant risk in the stock
market and thus, for moderately to highly risk-averse clients, the need for principal protection
programs such as fixed indexed annuities (FIA’s). Nearly 96% of FIA’s possess reset (or ratchet)
features that allow for locking in positive returns each annual or biannual period. By eliminating
the prejudicial effects occasioned by significant stock market declines, and locking in returns annually
or biannually, there is less of a need to try and capture large upside market swings to recover
from the declines.

As financial professionals, we are tasked with assisting our more risk-averse clients to protect
themselves from black swans and many of us have a fiduciary responsibility. One of the significant
developments for principal or asset preservation vehicles has been the fixed index annuity
(VanderPal, 2004). During the past few years various articles have been written regarding the
value in FIA’s and some people relying upon these studies have drawn misleading inferences
from them.

The article begins by dispelling the two basic errors people often make in assessing the message
of FIA studies. We will illustrate these misconceptions by using actual crediting rates on various
kinds of FIA policies. With these data we are able to show actual returns on FIA’s rather than
make inferences from hypothetical crediting rates derived from assumed (and often constant) rate
caps, assumed crediting rate formulae, and hypothetical participation rates, often coupled with
theoretical stock market and interest rate moves. This should help inform the public and correct
the inaccurate information portrayed by some journalists and industry professionals. Furthermore,
the article will delve into additional FIA features that provide advantages not found in ordinary
securities and various principal preservation programs.

FIA Market Growth
The table below indicates the growth in sales of FIA’s since 1997. Overall sales of FIA’s in 2008
of $26.7 billion are small compared to fixed deferred annuity sales of $95.1 billion and variable
annuities sales of $155 billion in 2008 (Green, 2009), and dwarfed by securities sales.
Equity Index Annuity Sales
Year In billions of dollars
1997-3.00
1998-4.20
1999-5.15
2000-5.25
2001-6.50
2002-11.70
2003-14.01
2004-23.00
2005-27.26
2006-25.30
2007-25.20
2008-26.70

Sources: Various reports from The Advantage Group, and (Koco, 2009)
Although the FIA market may be small relative to more established markets, it has nonetheless
attracted several performance studies. We have noticed two basic limitations that typify most
studies and articles that attempt to describe potential index annuity performance. The first of
these is assuming crediting formulae that are rarely used and crediting rates that are seldom observed.
While this type of exploratory exercise is fine in and of itself, a problem arises when
readers assume the theoretical results are somehow representative of the index annuity world.
The second limitation is making assumptions about stock market and interest rate behavior that
are not well supported. This can lead people to make inferences about actual FIA behavior that
are unjustified. Our study examines these limitations and shows how actual index annuity returns
are at odds with many of the hypothetical conclusions.

Are Hypothetical Returns Representative?

Collins, Lam and Stampfli (2009) created a term end point structure (they call it a multi-year,
point-to-point) that applied a 75% participation rate to any gain over a seven-year period. They
then calculated the annual return, deducted a 1% spread, and finally compounded the lower of
8% or the calculated annual yield to produce the total gain for the period. This is a rather cumbersome
structure, and one we cannot find was ever used on any index annuity.

In reviewing specifications on the over 400 index annuities marketed since the first index annuity
sale in February 1995 (Marrion, 2003), we failed to find any term end point product that used a
crediting method which had a participation rate of less than 100% combined with both a cap and
a yield spread greater than zero. Indeed, in reviewing all of the product information we have assembled
since 1995, the only annuity we found which had a participation rate of less than 100%
that could change each year and deducted a yield spread or asset fee and had a cap was the
Americo FlexPlus annuity marketed around the turn of the century. However, it did not use a
term end point design; instead this product used an annual reset or ratchet design, the performance
of which differs radically from a term end point structure (Marrion, 1996, 1997, 1998,
1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007).

Often a financial columnist or an occasional other writer will dismiss the index annuity concept
by proposing that a consumer purchase a long-term zero-coupon bond together with an index
fund instead of an index annuity (Clements, 2005; Pressman, 2007; Warner, 2005; McCann and
Luo, 2006). These columnists and other writers often posit the term end point crediting method
as the representative interest crediting structure. However, all term end point designs account for
less than 4.5% of sales over the last four years and term end point design using two crediting
components represents even less (Marrion, 2006, 2007; Moore, 2008, 2009). Indeed, Collins,
Lam and Stampfli (2009) base their conclusions on a term end point that uses a cap, but less than
1% of the products have ever placed a cap on a term end point crediting method (Marrion, 2009).
Such a product is certainly not representative of index annuity crediting methods in practice.

The assumed index participation rates may also not be representative. For example, for their
chart of seven-year periods starting in December 1988 and with the final seven-year period beginning
in December 2000, Collins, Lam and Stampfli (2009) assume a term end point participation
rate of 70% to 75%, depending upon whether the seventh-year index values are averaged,
and place an 8% cap on any yearly gain. Since index annuities were not around until the mid-
1990s we cannot decisively state what rates would have been for the early years used. However,
one can gather the actual participation rate data from when products did appear. We can state
that based on actual FIA’s offered, if you had purchased every available index annuity using a
term-end point annuity with a seven-year term on the first business day of each month from
January 1997 through December 2000 your average participation rate would have been 72%
without a cap (Marrion, 1997, 1998, 1999, 2000).ii

Looking at “representative” annual reset methods, Collins, Lam and Sampfli (2009) assume 55%
index participation with a 7% annual cap or 60% averaged index participation with a 7.5% cap.
McCann (2008) compares returns from 1990 through 2007 of the S&P 500 with a hypothetical
annual reset point-to-point design that assumes a constant 6.5% cap. However, in reviewing actual
new money rates for annual reset designs from 1996 to the present, one would have encountered
effective participation this low at only a few points in 2003 and 2004 and in 2007 and
2008. Indeed, many averaging products were offering 100% first-year participation without a cap
in the late ‘90s, and many annual point-to-point products have offered 100% participation allowing
for possible double-digit gains (Marrion, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003,
2004, 2005, 2006, 2007)

Wharton Financial Institutions Center

There is nothing wrong with showing how a term end point method might have performed under
these assumptions. However, we must keep in mind that the results of the study are not representative

of FIA’s performance, as they depend upon a crediting rate method not used in over 95%
of sales, and combinations of other contract features not observed in practice.

Dubious Assumptions

#1 Participation Rates and Caps Never Change

Collins, Lam and Stampfli (2009) assumed an averaging method had a 60% participation rate
with a 7.5% cap and applied it to the past. McCann (2008) assumed a constant 6.5% cap for all
of his index annuity performance calculations, which appears to have been a cap on the date his
story was completed, when interest rates were heading toward historic lows. On the day he completed
his story the constant maturity rate of a 10-year U.S. Treasury Note was 3.64%; by contrast,
during the 1990 until 2000 period (within the time frames of both studies) the 10-year
Treasury rate was nearly twice as high, averaging 6.66% (Federal Reserve Board, 2009). Lewis
(2005) assumed either a 5% or 9% cap on an annual reset design and ignored the interest rate environment
that might change these caps, but allowed for the returns to positively affect the T-bill
comparison he made. Higher bond yields generate more interest income thus allowing carriers to
buy or synthesize more options to increase index participation, which is why some annual pointto-
point products were able to offer 100% participation and 14% caps in the previous decade
(Marrion, 1996)
.
Lewis (2005), McCann (2008) and Collins, Lam and Stampfli (2009) assume constant index annuity
participation holding rates, caps and spreads steady over long periods of time. The flaw is
this does not take into account the real world effect of changes in interest rate environments and
market volatility’s effect on the cost of providing the index participation. One cannot assume today’s
rate would have existed in the past because the financial conditions of the past were often
quite different. One cannot simply posit a participation rate or cap on crediting rates, hold it constant,
and then attempt to make conclusive comparisons with actual stock index returns. Clearly
the reach of the conclusions is limited by the unrealistic assumptions underlying the annuity
modeled.

Not every study adopts these simplifying assumptions. Gaillardetz and Lin (2006) note that when
interest rates increase participation rates also go up, unless offset by increased volatility. One
carrier suggested that the uncapped guaranteed participation rates on their seven-year averaging
annual reset product from 1980 through 1995 would have ranged from 135% to 260% based on
bond yields and call option prices in effect (Physicians Life, 1996). They understand that index
participation is driven by bond yields and option costs and these change over time.

#2 Annual Stock Market Returns of 17.6% Are Normal

Collins, Lam and Sampfli (2009) mention that many attempts to show index annuity comparisons
are exercises in data mining and we quite agree. One way to data mine is to make long-term
predictions based on using low participation rates that do not represent the reality of long-term
rates. Another is to intentionally select periods that favor one choice over another.


McCann (2008) makes a performance comparison over a 30-year period that happens to start in a
year with the lowest end-of-year S&P 500 value over the previous 45 years. Using the correct
December 2004 index values, the annualized growth rate of the S&P 500 for McCann’s selected
comparison period is 10.05%. By contrast, the S&P 500 growth rate from December 1954 to December
1984, another 30-year period, was 5.25%, and the average annual growth from December
1964 to December 1994 was 5.79%.

In the 30-year period that McCann selected for constructing his comparisons, the S&P 500 ended
at 1211.92. If you used a monthly averaged annual reset method to compute where a monthly
averaged S&P 500 would have ended at you get an ending value of 591, which is 49% of the actual
S&P 500 level. By contrast, if your 30-year period ends December 1984 the S&P 500 level
is 167.24; however, the monthly averaged S&P 500 computed value is 161.37, almost equal to
the actual S&P 500 level. Many performance comparisons pit index annuities against stock market
investments over the ‘80s and ‘90s when stock market returns averaged 17.6% and ignore the
preceding eight decades with their average return of 8.5% (Bogle, 2003).

#3 Stock Market Returns Conform to a Normal Distribution, Interest Rates and Volatility Are Constant

A more egregious problem in some of the studies that simply simulate hypothetical stock market
return scenarios in order to generate hypothetical policy crediting rates is that the simulations are
often based on an assumed distribution of stock returns that cannot be supported. For example,
McCann and Luo (2006) have conducted studies of hypothetical crediting rate behavior assuming
that equity market rates of return conform to a Normal distribution. When Babbel, Herce and
Dutta (2008) re-examined that study but used an empirical distribution which matched the historical
record, while keeping in tact all of the other assumptions of McCann and Luo, they found
that annual crediting rates in the range of 5-15% were about twice as common as what were being
credited under the Normal assumption. This implies that FIA’s were far more valuable than
was being represented under the hypothetical distribution of stock market returns.
In a similar vein, several studies assume that interest rates and volatility are constant throughout
an annuity’s life, in order to construct their performance comparisons. Of course the simplifying
assumption has never occurred in the marketplace, and the alternative investments to which
FIA’s are compared have their returns affected by interest rate movements as well as volatility
changes.

#4 Managerial Discretion Is Not Involved

Over 95% of index annuity sales are in products that may change at least one element of their
interest crediting methodology after the reset period. Two primary factors affecting subsequent
index participation are bond yields and the price of call options (Gaillardetz and Lin, 2006).
However, the ultimate determining factor in setting index participation in future years is not the
interest rate environment or the cost of options, it is what carrier management decides to do. This
human element introduces a random variable that cannot be quantified, thereby making any attempt
to project any returns ultimately subjective.

Reality

Index annuities have been producing returns since the first one was purchased on February 15,
1995. Unfortunately, most of the articles and studies ignore these data and attempt to portray
how index annuities should have performed while ignoring actual results. What we show below
are actual results. They are not intended to be a prediction of how index annuities will perform in
the future, nor are the results intended to be representative of overall industry performance. They
results are what they are. Our data set does have limitations, which we describe presently so that
readers may draw their own conclusions.

Annualized Five-Year Returns

Period S&P return FIA avg. return Number of FIA’s Return Range
1997-2002
1998-2003
1999-2004
2000-2005
2001-2006
2002-2007
2003-2008
9.39%
-0.42%
-2.77%
-3.08%
5.11%
13.37%
3.18%
9.19%
5.46%
4.69%
4.33%
4.36%
6.12%
6.05%
5
13
8
28
13
23
19
7.80% to 12.16%
3.00% to 7.97%
3.00% to 6.63%
0.85% to 8.66%
1.91% to 6.55%
3.00% to 8.39%
3.00% to 7.80%

These results are based on copies of actual customer statements received with personal information
blacked out, for each of the preceding five-year periods, requested on an annual basis since
2002. The return data reflect contract periods closest to 30 September with the exception of the
1997-2002 period that uses a 2 January date. The returns reflect the results of products with term
end point, high water mark, and annual reset designs with and without crediting rate caps, and
with and without averaging. The returns do reflect any fees charged, but not surrender penalties.
Annuitization was not required to receive these returns. Initial premium bonuses, if any, were
reflected only if immediately available as cash values (did not require vesting or annuitization).

There are several limitations with the data above. The main one is that they are derived from carriers
that chose to participate and that chose the products for which they reported returns. This
could have imparted some bias in returns, and may differ from what a larger, more random sample
would have produced for the periods. Although some of the annuities had contract years ending
on the 30th, the contract anniversaries encompassed a three-week range around that end date.
The data collected are very few for some periods. And the data reflect results across a very small
spectrum of time, only looking at 1997-2008 and then only at one day out of each year. Nonetheless,
the 109 contracts for which we have data are real contracts and reflect actual crediting rates
that were provided to annuity owners over time under twelve different crediting rate structures
used in FIA designs.

From 1997 through 2007 the five-year annualized returns for FIA’s averaged 5.79%. This compares
to 5.39% for taxable bond funds and 4.73% for fixed annuities. The FIA and taxable bond
fund provided a negative correlation of 0.11 which is a very important consideration for invest
ing and asset allocation to work effectively. The FIA may be considered a separate asset class.
The authors support the concept of principal protected investments being their own asset class
due to removing the negative side of the two-tailed distribution and providing for variability in
upside performance with guaranteed minimum returns which sets the overall earnings at maturity
of the FIA contract above zero.

This next data set reflects the actual real-world total five-year returns credited to annuityowners
for an annual point-to-point with cap structured index annuity assuming an annuity is purchased
on the 21st of every month beginning April 1996 with a final purchase on December 2003. This
annuity was selected because it has been steadily offered every month for 13 years and its performance
is publicly available. It is not intended to be representative of anything except itself.
The chart below compares the FIA returns with the total returns of the S&P 500 over the same
period, and a blended return composed of 50% of the S&P 500 total return and 50% of the compounded
return for a series of one-year, U.S. constant maturity T-bills. We have not deducted
from these alternative portfolios any of the annual expenses that typify mutual funds, thereby
biasing the comparison to favor mutual funds.

Collins, Lam and Stampfli (2009) attempted to predict the future by using the past and creating
“a rich set of probable future results [that] is available for inspection.” Based on these “probable”
futures they found the index annuity minimum guarantee to be beneficial at times, but that the
index annuity payoff “always lags the investment portfolio’s payoff for returns.” McCann (2008)
created his own hypothetical annuity structure and in the future he created, he stated that “99.8%
of the time the investor would be better off with the Treasury securities and stocks than with the
equity-indexed annuity.” However, if your future was the actual period from April 1996 through
December 2008, and you had purchased this real-world-still-being-marketed index annuity
month after month, the not-pretend index annuity results bested the S&P 500 alone 66% of the
time and a 50/50 mix of one-year Treasury Bills and the S&P 500 80% of the time.

Liquidity and Risk

According to Collins, Lam and Stampfli (2009), FIA’s are not liquid investments and have “formidable”
surrender charges. The authors failed to take into account the various free withdrawal
provisions in all FIA’s. Generally a 10% withdrawal is allowed annually without surrender penalty
and some firms offer more standard withdrawal provisions. That is about triple what you can
withdraw from a Treasury bond portfolio in today’s interest rate climate without subjecting yourself
to losses of principal occasioned by bond price fluctuations, and even more so when the alternative
portfolio includes common stock. Most articles analyzing appropriate withdrawal rates
for retirees range in the 4-6% range annually, depending upon various methods of thought. This
being said, a 10% withdrawal privilege should not be an issue for most retirees and individuals.

Nearly all FIA’s provide a full surrender value upon death of the owner or annuitant. Many FIA
issuers offer full surrender for nursing home stays, extended hospital visits and terminal illness
(VanderPal, 2008). Several carriers offer full surrender for unemployment if under 65 years of
age. The surrender charges when applied outside of the free withdrawal provisions typically depend
on the minimum term of the annuity and whether any bonuses are paid, and usually decline
each following year. Another difference is that in the case of a non-qualified annuity purchase,
the accumulation value grows tax deferred, whereas with a non-qualified portfolio of stocks and
bonds, taxes are incurred along the way. Babbel and Reddy (2009) have shown that the difference
between these two tax treatments can ultimately produce after-tax income potential from
the annuity that would require alternative taxable mixes of stocks and bonds to produce annual
returns that must be substantially higher than the annuity returns in order to provide for an
equivalent after-tax income.iii This is another missing element in our comparison that biases the
result in favor of the alternative portfolio. Moreover, FIA’s in almost all states are protected from
creditors and against seizure in situations of litigation, which is not typically true of stock and
bond mutual funds unless held in a protected vehicle.

FIA opponents commonly cite surrender fees as an issue. First, with the various free withdrawal
privileges and based on the appropriate range of annual withdrawals, most individuals who purchase
an FIA will not encounter a penalty except through their choice. Second, surrender fees are
required by state insurance regulators in order for policies to be qualified for sale. The existence
of surrender fees helps an insurer recapture up-font costs on products that were designed to be
held for several years, and protects persisting policies from the imposition of extra costs by those
who choose to surrender early. Third, the idea that securities do not have penalties is not only
flawed but simply not accurate. Even if the actual mutual fund one is holding does not assess surrender
charges, it is subject to annual management fees and market risk. Bogle (2005) has shown
these costs of “financial intermediation” are non-trivial over time. If your mutual fund or investments
decline in value 20% and that investor is making withdrawals for income, this may become
a catastrophic event for the investor. Remember that the more an investment declines, exponentially, the more the investment must go up to simply recover and adding withdrawals to the
scenario can exacerbate a potential catastrophic event (VanderPal, 2008). Furthermore, FIA’s
provide a guaranteed minimum return along with principal preservation which mutual funds and
other similar investments do not provide.

The S&P 500 index as of August of 2009 finally reached 1,000. It has taken 12 years for the
S&P 500 index to break even due to the volatility and risk with the two economic bubbles experienced
from technology stocks and the real estate crisis. While the S&P 500 index has produced
near zero total return over 12 years, the FIA using the S&P 500 index on average produced returns
of 5.79% using a 5-year annualized rolling return from 1997-2007. Even if you add taxable
dividends to the index, the FIA has performed better, at least based on the data we have reviewed.

Fees and Expenses

“Although FIAs do not provide complete participation in an index, based on various crediting
methods and market anomalies, returns may actually be better over time than in mutual funds or
variable annuities. Consider that variable annuities with mortality and administration expenses
(M&E), sub-account management fees and other various charges can account for up to 4.00% of
annual expenses that erode market returns on variable annuities” (VanderPal, 2008). According
to Morningstar the average mortality and expense and management fees are 2.08%. For example,
a variable annuity sub-account that earned 10% in the market would net less than 8% to the client’s
account after internal fees are deducted from earnings. Unlike mutual funds, an FIA does
not deduct sales charges, management fees or 12b-1 marketing fees. Instead, the insurance company
uses a small amount from the underlying portfolio which lowers participation in the market
index to cover administrative costs and commissions to brokers (VanderPal, 2008). Because the
FIA provides policy crediting rate formulae and periodic annuityowner reports net of any fees
and management expenses, it does not separately disclose them.

Consumer Risk Aversion

Finally, most of the aforementioned fixed indexed annuity studies have failed to take into account
the level of risk aversion of an individual consumer. An exception to this pattern is the
study of Babbel, Herce and Dutta (2008) that explicitly takes into account the level of consumer
risk aversion. Using the criteria of multiperiod utility analysis, they find that for moderate and
strongly risk-averse individuals, the fixed indexed annuity is judged superior in performance to
various combinations of stocks and bonds. This is not surprising because a risk-averse consumer
will penalize an investment alternative that does not avoid downside risk in a quest to achieve
superior returns. Because FIA’s are designed in a way to avoid downside risk, they tend to produce
preferred return patterns for such consumers when compared to alternative investment
strategies that expose consumers to significant levels of that risk.


Conclusion

Much of the analysis published on index annuities is based on hypothetical returns that are generated
by using selected time periods and crediting criteria to produce the preordained conclusion
desired. If the analysis is produced for the annuity industry the conclusion is positive, if it is directed
towards the securities industry it is negative. The reality is at least some index annuities
have produced returns that have been truly competitive with certificates of deposit, fixed rate annuities,
taxable bond funds, and even equities at times (Marrion, 2008). How will index annuities
perform in the future? We do not know but the concept has proven to work in the past and any
articles should reflect this. FIAs were not designed to be direct competitors of index investing
nor have FIAs been promoted to provide returns to compete with equity mutual funds or ETFs.
The FIA is designed for safety of principal with returns linked to upside market performance.

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40-46.
Physicians Life Insurance Company. 1996. Vista 500 Market Index Annuity Producers Guide, p.15.
Pressman, Aaron. 2007. “Retirement made complicated; why equity-indexed annuities have a bad name
and what investors need to know.” Business Week. Sep 24, Issue 4051; pg. 98.
Richardson, M. T. 2009. The Ivy Portfolio. Hoboken: John Wiley & Sons, Inc.
Taleb, N. N. 2007. The Black Swan:The Impact of the Highly Improbable. London: Penguin Books.
VanderPal, Geoffrey. (2008) “Equity Index Annuities.” Journal of Personal Finance 7, 2.
VanderPal, Geoffrey. (2004) “The Advantages and Disadvantages of Equity Index Annuities.” Journal of
Financial Planning 17, 1 (January).
Warner, Joan. 2005. “EIAs: Behind the hype: Equity-indexed annuities are flying off the shelves, but they
carry risks that regulators fear are not fully disclosed.” Financial Planning (October).

Endnotes

i A recent confirmation of this finding is in Babbel, Herce and Dutta (2008). In their study, the authors
found that there was less than one chance in a million that monthly stock market returns from 1926-2008,
and various sub-periods during that time interval, conform to a Normal distribution, whether measured by
a Jarque-Bera, an Anderson-Darling, or a Kolmogorov-Smirnov goodness of fit test.
ii To be precise, the average term end point participation rates for seven-year periods were: 1997-87%,
1998-71%, 1999-61%, 2000-70%.
iii Their study showed that an alternative portfolio would have to generate an additional pre-tax return that
in some cases reached over 200 basis points per year. The ultimate size of the tax benefit from tax deferral
depends on the length of time the annuity is held during the accumulation and decumulation phases of
ownership, whether a deferred annuity is annuitized at the end of the surrender period, or taken as a lump
sum distribution, the level of yields net of expenses, the marginal tax rates on ordinary income of the investor,
and the differential between tax rates on ordinary income and tax-preferred treatment of dividends
and capital gains. McCann and Luo (2006) claimed that the benefits of tax deferral were “de minimis.”

Wharton Financial Institutions Center

www.AnnuityDefinition.com

Technorati Tags: equity index annuity, indexed annuities, fixed index annuity, index annuities, fixed indexed annuities, deferred annuity, life annuity

Elliottwave

How A Bear Can Be Bullish And Still Be Right
Bob Prechter: the only good label is an Elliott wave label...
September 8, 2009

By Nico Isaac

In recent months, Elliott Wave International President Bob Prechter has become something of a household name. In the final two days of August 2009 alone, Bob was mentioned by several news outlets from MarketWatch to the New York Times. The claim to his "fame" --

EWI was one of the only technical analysis firms to anticipate a sharp rally in U.S. stocks as they circled the drain of a 12-year low this spring, a feat made ever more exceptional considering the widespread image of Bob as being the ultimate "Big, Bad Bear."

The lesson? Believe in the facts, not in the "widespread image."

Bob Prechter has always said that successful forecasting should look to the current wave count (and various other technical measures) for direction. He has never permanently tied himself to the mast of definition -- i.e. "bull" or "bear."

For this reason, EWI's team of analysts have been able to stay one step ahead of the biggest turning points in the Dow Jones Industrial Average, from the very start of the index's historic 2007 reversal.

To wit: This two-year chart of the Dow incorporates several calls from our past publications as they coincided with the market's most memorable peaks and troughs:

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For more analysis from Robert Prechter, download a free 10-page July issue of Prechter's Elliott Wave Theorist.
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The chart above presents the abstract details of our past analysis. Here is the expanded version of those insights as they appeared in real-time:

July 17, 2007 TheElliott Wave Theorist:

"Aggressive speculators should return to a fully leveraged short position now. We may be early by a couple of weeks, but the market has traced out the minimum expected rise, and that's enough to act on."

Soon after, as the DJIA neared its own historic Oct. 11, 2007 apex, the Oct. 9 and 10 Short Term Update amped up the urgency of its analysis and wrote:

“Odds have increased that a market high is in place. The structure, coupled with turns in the other markets, suggests a top is in place. The potential, at the least, is four a large selloff... Watch Out! The market faces a stout correction."

Before landing at its March 10, 2008 bottom, the March 5 Short Term Update afforded respect to a bullish alternate count and wrote: "Prices should carry above the wave a high (13165) before it ends."

At its four-month high, the March 16 2008 Elliott Wave Theorist went on high, bearish alert and wrote: The DJIA is entering "Free Fall territory."

One week before the U.S. stock market landed at its 12-year low of March 9, our Feb. 27, 2009 Short Term Update utilized a traditional turning pattern to outline a specific time window for the onset of a major upside reversal. In STU's own words:

"By all indication, this pattern is back on track... the turn will come on or near March 10, 2009. Anywhere in this time period may mark a turn, which will obviously be a market low."

Once the bullish winds of change had turned, the March 16 Short Term Update wrote:

"When the market speaks, it behooves us to listen. The implications of this are that the... major stock indexes are in the initial stages of a multi-month advance."

Finally, the April 2009 Elliott Wave Financial Forecast calculated a specific target range for the Dow's rally: the 9,000-10,000 level.

So, now that the upside objective is met, where are prices set to go next? For more analysis from Robert Prechter, download a free 10-page July issue of Prechter's Elliott Wave Theorist.

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Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Five Fatal Flaws of Trading

By Jeffrey Kennedy

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, one of Elliott Wave International's senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading? We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

Why Do Traders Lose?

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 – Lack of Methodology

If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
  
Fatal Flaw No. 2 – Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 – Unrealistic Expectations

Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.

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For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

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Fatal Flaw No. 4 – Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."

Fatal Flaw No. 5 – Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the 'aim small, miss small' movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip

Trading successfully is not easy. It’s hard work ... damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

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Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting package.

Immediate Annuity - Lifetime Income

Immediate Fixed Annuity - FIXED INDEX ANNUITY DEFINITION

Income NOW riders on fixed annuities are the most flexible. You are NOT annuitizing and the income can increase when the fixed annuity increases. The income can be stopped and restarted. If the fixed annuity yields 8% one year, you can take that out instead of the income rider payment. You'll enjoy much more potential and a guaranteed income. Fixed annuities can easily be annuitized (immediate annuity) in the future if base interest rates increase substantially as they did briefly in the early 80's. The year 1982 was the best time to buy a life income annuity also known as an immediate annuity.

Equity Index Annuities: Great Idea Or Flawed Flop?

NAFA Responds to Inaccuracies in IndexUniverse.com Article
Equity Index Annuities: Great Idea Or Flawed Flop?
Written by Jeremy Burger
IndexUniverse.com
Wednesday, 10 June 2009
It is hard to understand why IndexUniverse.com would choose to publish an article filled with
misleading information and factual errors when its stated goal is to provide the “industry's best
news, columns, research, and features and the website aims to be “educational, thoughtprovoking,
and, rigorously independent in perspective.” Since fixed indexed annuities have an
interest crediting formula that is calculated using an index, we thought your readers might be
interested in the facts rather than the article’s reiteration of the same errors made by those in
the investing world. NAFA hopes this information helps IndexUniverse.com meet its goals by
publishing this clarification of information and, in so doing, achieve our mutual aim of aim of
education and independence
Error #1
Some policies make you wait as long as 20 years and charge you 20 percent for first-year
withdrawals.
The Facts:
1. There are 273 products available today and the maximum surrender period is 16 years
NOT 20.
2. The majority (82%) have surrender charge periods of 10 years or less.
3. 2/3rds of the products with surrender periods of 14-16 years (less than 1/10th of the total
products available) offer interest rate bonuses up front.
4. Only one product charges 20% surrender charge in the first year and that product also
pays the customer a 10% premium bonus on all premiums paid in the first year, making
the net charge roughly 10%. This product also automatically adds a Lifetime Income
Benefit Rider that guarantees annual withdrawals. Many consumers have decided that a
bonus and guaranteed income are benefits worth considering in exchange for
committing to a longer surrender period. Had Mr. Burger done more initial research, he
would have found that most states have adopted the latest NAIC annuity standard nonforfeiture
law which does not allow net surrender charges at the level he excoriates.
Error #2
Your guaranteed minimum return… probably doesn’t apply to the full balance in your
account.
The Facts:
Mr. Burger’s error is often made by those who write for the investment world because they
typically do not understand the insurance element of guaranteed minimum interest.
The minimum guarantee is in indexed annuity productsi provide a minimum guarantee that is a
minimum interest calculation (based on the state’s non-forfeiture law) such as 2 or 3% on 90%
of premiums or the contract’s current account value, whichever is greater1. The minimum
1 Based on the products currently available.

Lifetime Annuity-The Retirement Security Needs Lifetime Pay Act, H.R. 2748

Congressman Earl Pomeroy -- Pomeroy, Brown-Waite Introduce Legislation to Promote Income Security in Retirement

Pomeroy, Brown-Waite Introduce Legislation to Promote Income Security in Retirement
Monday, June 08, 2009

Washington, D.C. – Congressman Earl Pomeroy today introduced bipartisan legislation along with Rep. Ginny Brown-Waite (R-FL) that will promote lifetime income security by providing incentives for workers to annuitize part of their retirement savings.

“For years, the federal government has recognized its duty to assist American families in building a retirement nest egg,” Pomeroy said. “Saving and investing for the long term is extremely important, especially in these challenging times. A greater retirement challenge lies ahead: managing assets to make sure that your retirement savings last a lifetime. The Retirement Security Needs Lifetime Pay Act will provide families with incentives to plan for a secure lifelong retirement.”

“American workers spend a significant portion of their careers planning for their retirement. When the economy falls on hard times, it should not mean that their plans have to go on hold as well,” Congresswoman Brown-Waite said. “This bill incentivizes workers to invest in a retirement annuity so that their golden years can go on as planned.”

The Retirement Security Needs Lifetime Pay Act, H.R. 2748, would encourage workers to annuitize some of their retirement savings by providing a 50 percent tax exclusion for up $10,000 of lifetime annuity payments each year. A lifetime annuity is the only financial vehicle that delivers a steady stream of income for life. Additionally, the bill would exclude from taxes, 25 percent of lifetime income payments from Individual Retirement Accounts (IRAs), qualified plans and similar employer-sponsored retirement savings plans other than defined benefit plans. The bill also excludes the value of longevity insurance from amounts subject to required minimum distributions and clarifies the taxation of partial annuity payments.

By providing incentives for workers to annuitize part of their retirement savings, this bill addresses the management of savings once an individual reaches retirement, an issue previously ignored by public policy. Congress has gone to great lengths to provide incentives to encourage workers to accumulate enough savings for retirement. However, upon retirement, workers face numerous risks in managing those savings throughout their retirement years.

AnnuityDefinition.com

Fixed Index Annuity

Equity‐Indexed Annuities: A Costly Way to Limit Your Lossesi Strong recent results mask plenty of pitfalls.
By Scott Woolley
June 05, 2009
Forbes.com
NAFA, the National Association for Fixed Annuities, is an educational trade association incorporated to
promote the awareness and understanding of fixed annuities. The common media malady is that fixed
annuities – regardless of the interest crediting formula – are investment products. Fixed annuities are
no more purchased as investments than are life or long term care insurance ‐ nor should they be. All of
these products are purchased to protect and preserve assets. Fixed indexed annuities offer guaranteed
death benefits, minimum interest and income you cannot outlive. Fixed indexed annuities can also
provide additional interest over and above the guarantees when the index performance allows.
The headline demonstrates a complete misunderstanding of these products. They do not “limit your
losses” from stock market declines they ELIMINATE the possibility that any of your premium or earned
interest will be lost. While the list of errors, omissions and half‐statements in this article is very lengthy
indeed, we will limit our corrections to the most egregious ones. Helping Americans to better
understand fixed index annuities will encourage them to learn more about a product that has saved
millions of dollars of retirement savings from equity losses.
1. A major error in the article is the assertion that fixed indexed annuities are offered by Prudential
and Met Life. Neither company offers a fixed indexed annuity. Prudential offers only one choice
of a fixed deferred annuity product and Met Life offers two (single and flexible premium)
product choices and none of these deferred annuities credit interest based on the performance
of an index. MassMutual's product is a single premium variable annuity where the purchase
payment is allocated between a fixed account and an equity indexed subaccount like the S&P
500. Genworth exited the indexed annuity marketplace in October 2008. It is curious that you
did not choose to inform your readers with company names and website links to the real “major
companies” that offer indexed annuities. Just about 15 minutes of research would have
informed you that the four companies you named are not fixed indexed annuity carriers.
2. The article itself contradicts FINRA’s statement about fixed indexed annuities that “one of the
most confusing features is the method used to calculate the gain.” The article easily explains
the feature using a mere 45 words.
3. The bias of the article is transparent when the only “regulatory authorities” referenced are the
two that are seeking to claim jurisdiction over a product they actually do not understand. While
NAFA certainly has views that differ from those quoted, an effort at objectivity should have
referenced our White Paper on Indexed Annuity Productsii, so that readers could draw their own
conclusions. Also, IMSAiii and the NAICiv also provide good information for consumers on their
respective websites.


4. It is good that you acknowledge that fixed indexed annuities show strong results, but why do
you limit it to recent history? Perhaps because during the recent economic crisis, while millions
of Americans have seen their 401(k) and retirements savings slashed in half, owners of fixed
indexed annuities have not lost one penny of their account value? But it is also true that the
tradeoff for this protection has also rewarded them with very respectable interest earnings.
Below is NAFA’s report by Miguel A. Herce, Ph.D of CRA International, Inc. showing the
annualized return over 10‐year periods. Many American’s might disagree that 6.5% is a “costly
way to limit losses.”
Period S&P 500 with no Dividends Monthly Averaging Index
(0% floor)
JAN 1975 – OCT 2004 11.6% 7.7%
JAN 1975 – OCT 2008 10.8% 7.5%
JAN 1926 – OCT 2008 7.6% 7.0%
JAN1995 – OCT 2008 6.1% 6.5%
If you are reluctant to take our word for it, perhaps you will trust the excerpt from a fellow journalist,
Steven Hartv, who writes:
If you are generally concerned with potential downswings in the market, then an index annuity
can be a great choice for your investing needs. You can participate in the potential of a strong
market run without having to deal with severe loss during a sharp market downturn. In addition,
the overall principal is safely protected so that no loss will occur. The setup of the index annuity
to give a profit at a minimum rate of return, however, ensures that the investor still sees a profit
(however small) during the lean times of the index. In other words, the index annuity seems to
provide the chance to have your cake and eat it too with a low‐risk financial product that you
can benefit from over time.
i http://resources.nafa.com/files/2009/06‐jun/6‐9‐forbesresponse.pdf
ii http://www.nafa.us/local_links.php?action=jump&catid=7&id=105
iii http://www.nafa.us/local_links.php?action=jump&catid=7&id=106
iv http://resources.nafa.com/files/2009/06‐jun/6‐9‐naicbuyersguidetoannuities.pdf
v http://www.affsphere.com/Money‐and‐Finance/Annuities/What‐is‐an‐Index‐Annuity‐1.html

Forbes Fixed Index Annuity Article "A Shocking Mistake. " Equity-Indexed Annuities: A Costly Way To Limit Your Losses

From: Sheryl Moore
Sent: Monday, June 08, 2009 7:24 PM
To: 'readers@forbes.com'
Subject: FW: ARTICLE: Equity-Indexed Annuities: A Costly Way To Limit Your Losses

 

Dear Forbes Editor,

 

I am an independent market research analyst who specializes exclusively in the indexed annuity and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I do not endorse any company or financial product specifically, but I do believe in the value proposition of indexed products. I recently had the occasion to read your article, “Equity-Indexed Annuities: A Costly Way To Limit Your Losses.” As the foremost authority on indexed annuities, I wanted to personally respond to the material misstatements and misleading testimonial by Scot Woolley in this article. I was absolutely appalled that a source as credible as Forbes would publish such a blatantly false and ignorant article. Scott Woolley appears to be very uneducated on indexed annuities, and the insurance industry in general. I would like to think that Forbes generally does a better job at monitoring the accuracy of their contributors’ articles than they did on this occasion.

 

Specifically, the most shocking and obvious mistake in Woolley’s piece is the fact that Massachusetts Mutual Life Insurance Co, and Prudential Financial have never offered indexed annuities, EVER. Yet, he sites them as being carriers that underwrite these products. In addition, MetLife does not offer indexed annuities themselves, but instead offers their agents a choice of four indexed annuities that are offered by other insurers. Genworth Financial exited the indexed annuity market on September 20, 2008. Certainly Woolley could not have done his homework on this article, as all one needs to do is Google “first quarter 2009 indexed annuity sales,” and they would have found the most credible resource on current carriers in the market: my firm’s sales data. It is distressing that this reporter put so little effort into backing-up his information.

 

In addition, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990s. The insurance industry has been careful to enforce a habit of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and instability (such as what we are experiencing now).

 

Also, indexed annuities are not a “combination investment and insurance product[s].” They are not an investment at all. They are a fixed insurance product that provides minimum guarantees, death benefits, and an income stream that consumers cannot outlive. Excess interest is credited based on the performance of an outside stock index, such as the S&P 500. The indexed annuity consumer is never directly invested in the stock market, and thereby never subject to the risk of loss due to market downturn. These benefits, coupled with this unique interest crediting, are what makes indexed annuities such an appealing, value-added product- particularly during times of market turmoil. The products are regulated by state insurance divisions, like other fixed insurance products.

 

Indexed annuities do provide limited upside interest potential, unlike securities products. This is what allows the insurance company to be able to afford the minimum guarantee that is provided to the consumer. So, regardless of the market’s performance, the worst the client can receive is zero interest crediting- no risk to principal as a result of market losses. No other product can offer such a strong value proposition, coupled with the insurance benefits of the indexed annuity. It is important to note that if the potential gains were unlimited on indexed annuities, there would be no guarantees, and THAT would be a variable annuity, not a fixed insurance product. We in the indexed annuity industry, are happy for this differentiation, as it is what drives the sales of these products.

 

Scott Woolley’s understanding of the basic pricing of indexed annuities is flawed. He believes that “the insurers who sell the annuities use derivatives to put collars around the annuities with limit both the upside and downside for investors.” In reality, the insurance company invests the majority of their funds in bonds, which cover the indexed annuity’s minimum guarantees. The invest a minute percentage of the funds in options, which provide the index-linked interest on the products. Contrary to Woolley’s allusions, the insurance companies have no control over the prices for the bonds and options. So, when the market becomes volatile, the same dollar that purchased the company a potential indexed annuity gain of 8% last month, may only purchase them a potential indexed annuity gain of 6% presently. So, while “the counterparties selling the hedges” may “jack up their fees,” as a result of market volatility, that merely translates into lower caps, participation rates, and higher spreads that are passed on to the consumer. This is not discretionary on behalf of the insurance company. Indexed annuities not only have minimum guarantees, but also minimum guaranteed caps/participation rates, and maximum spreads that are approved by the insurance divisions in the state the product is being offered in, prior to the product ever being made available for sale. When these caps, participation rates and spreads become unattractive compared to fixed annuities, sales of indexed annuities decline.

 

As far as “other fees” being “so high as to make the product a lousy buy”- indexed annuities do not have fees. A few indexed annuities offer an optional rider that has an explicit, stated account valued-based charge. However, these products are not like variable annuities which have numerous fees such as administrative fees, mortality & expense charges, as well as fees for optional riders. There are no “fat expenses” on these products, nor “ways to make it hard” to understand what you are really paying. All annuity costs and benefits are clearly disclosed in the disclosures that the consumer signs at the time of purchase. Yes, all indexed annuities have surrender charges. All fixed annuities have surrender charges. These charges are ten years on average, but can be as low as one year. In addition, a large percentage of the longer-term products offer an up-front premium bonus to provide an incentive to the annuity consumer. A surrender penalty is merely what allows the insurance company to credit competitive interest rates to the annuity, while the client has agreed to keep their money with the insurance company. The insurance company invests the consumers premiums, in order to make a return on the money, and credit this competitive interest rate. Without a surrender penalty, the insurance company would incur tremendous expenses that they would not be able to recover. In short, surrender charges are a pricing measure that allows insurance companies to make good on their promises, and back-up their claims-paying abilities.

 

Woolley’s citing of firms that are seeking to extend their regulatory authority beyond the scope of their purview is incredulous. Both the SEC and FINRA have vested interests in regulating these fixed insurance products. They do not regulate these products today, and therefore the state insurance division would be a far more credible resource on these products. They cannot be considered a reliable source on indexed annuities, as they have a plethora of inaccurate information on the products on their public websites and “alerts.”

 

Unfortunately, a few complex products have afforded this industry the perception of complexity over the past 15 years. However, the bulk of indexed annuities sold today are very simple to understand. In fact, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. All indexed annuities limit potential indexed interest through the use of a pricing lever such as a participation rate, a cap, or a spread. Typically, only one of these levers is used to limit the potential indexed interest on the annuity. However, the bottom line is that the crediting method and pricing lever used are irrelevant. Indexed annuities are priced to return about 1% - 2% greater than other traditional fixed money instruments. So, if fixed annuities are earning 5% today, and indexed annuity consumer can expect to receive 6% - 7% interest over the life of their indexed annuity. Sure, some years they will receive zero, and other years they may receive double-digit gains. However, the end goal is to receive a rate that is competitive with other safe money places, not to compete with securities products.

 

Every single indexed annuity ever sold limits the consumer’s risk of loss as a result of the market downturn at ZERO. No indexed annuity consumer has ever received a negative adjustment to their annuity’s value as a result of a market decline. This is precisely why these products are so appealing. In addition, when the annuity receives zero crediting, the market’s low point (the end measurement for the crediting method) is now the beginning date for the next index measurement on these products. This provides a tremendous opportunity for indexed gains when the market rebounds.

 

As a the foremost expert and consultant in this market, I can tell you that I have never heard of David Babbel. I can neither confirm nor deny the validity of his study, as neither myself nor my clients use him as a resource on these products. The bottom line is that indexed annuities are a great solution for millions of Americans that cannot stomach putting their retirement dollars at risk in the market. On the other hand, these same consumers can look forward to the opportunity for greater interest crediting than what they could earn at their local bank.

 

I was astounded to see Mr. Woolley’s statement that “getting stuck in these contracts if you need the money early” is a big problem. In reality, every indexed annuity sold today allows consumers annual penalty-free access to their account value, should the need arise. This amount is typically 10% of the annuity’s value annually, but it can be as high as 20%. In addition, 9 out of 10 fixed annuities provide penalty-free access to the account value in the event of certain triggers such as nursing home confinement, terminal illness, disability and even death. Quite contrary to this article’s statements, indexed annuities are some of the most liquid retirement vehicles available today.

 

Even more damaging was Scott Wooley’s statement that “many insurers rescind gains you may be owed if you get out early.” Exactly ONE of the 275 indexed annuities sold today works in this manner. In addition, sales of this product accounted for less than 2% of total industry sales as of the first quarter of 2009.

 

While it is true that all annuities are intended to be a long-term commitment, Mr. Woolley seems to miss the big picture. What makes indexed annuities the most important part of millions of American’s retirement plans is that indexed annuity consumers are more risk averse than individuals investing in securities products such as stocks, bonds, and mutual funds. Indexed annuities are a “safe money place,” intended to be compared against other safe money places (i.e. fixed annuities and certificates of deposit). Any insurance agent or advisor selling these products knows the difference. Why doesn’t Mr. Woolley, who purports himself as an expert on these products?

 

In closing, it would be so greatly appreciated if you would provide a correction to your readers on this blatantly false article. There are millions of Americans relying on the accuracy of your information, and clarifying Mr. Woolley’s article is a good way to attempt to repair the damage of his statements.

 

Please feel free to let me know if I can serve as a resource to you or your editorial staff in the future.

 

Thank you.

 

Sheryl J. Moore

President and CEO

LifeSpecs.com

AnnuitySpecs.com

Advantage Group Associates, Inc.

(515) 262-2623

Fixed Index Annuities

Forbes.com - Magazine Article

Forbes.com


Personal Finance
Equity-Indexed Annuities: A Costly Way To Limit Your Losses
Scott Woolley, 06.05.09, 5:35 PM ET

Their unsexy name aside, there's something undeniably seductive about equity-indexed annuities (EIA). Sold by insurance companies, these combination investment and insurance products promise investors a piece of any stock market gains while limiting downside when the market tanks. At the end of the investment, or accumulation, period, the annuity's owner is typically offered either a lump-sum distribution of the proceeds or regular payments based on the ending balance.

Over the past 15 years, the products have become increasingly popular and are offered by major insurers like Massachusetts Mutual Life Insurance Co., Prudential Financial, MetLife and Genworth Financial. While the investment features have looked increasingly alluring, the catch is that the stock market's wild seesawing could hardly have been better designed to enrich holders of equity-indexed annuities. Since 1995, these annuities have easily outpaced the S&P 500 and bond indexes alike.

"There is no asset category that outperformed them. We were extremely surprised, really just amazed," says David Babbel, professor emeritus of insurance and risk management, who conducted a study of equity-index annuity returns beginning in 1995.

Still, there are plenty of reasons to take a hard look at equity-indexed annuities before adding them to you portfolio. While rules differ, the basic idea is simple enough. The insurers who sell the annuities use derivatives to put collars around the annuities, which limit both their upside and downside for investors.

Tricky questions for buyers: Are those offsetting hedges being passed along at a fair price? And are other fees so high as to make the product a lousy buy?

The answer is "no" frequently enough that the investor alerts are posted by both the Securities and Exchange Commission and the Financial Industry Regulatory Authority. The products "are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked," FINRA warns.

Typically, equity-linked annuities come with "participation rates" that limit the amount of market gains in which annuity holders share. If a contract has a 70% participation rate and the S&P climbs 10%, the annuity holder gets a 7% bump, for example. In exchange, the investor receives a loss limit, which often guarantees that he will do no worse than break even each calendar year. For 2008, when the market fell 38%, annuity investors' relative returns look brilliant.

Babbel, who has consulted for the insurance industry, is quick to point out that the period he studied was a highly unusual one, marked by quick, sharp drops in the market. Those are precisely the kind of collapses that equity-indexed annuities are good at sidestepping.

Even if you assume that the market will perform during the next 15 years like it did during the past 15, there's no guarantee that the counterparties selling the hedges won't jack up their fees and lower the performance of the equity indexed annuities.

Then there are the fees investors are likely to pay for the privilege of owning an equity-linked annuity. Like other deferred annuities, equity-index features regularly have fat expenses built in, often in ways that make it hard, if not impossible, to understand what you're really paying.

Another big problem: getting stuck in these contracts if you need the money early. Many come with sizable surrender fees that remain in force for several years. What's more, many insurers rescind gains you may be owed if you get out early.

As the old investing saw goes: Past performance is no guarantee of future results. If you have a long-term horizon and want to limit your potential losses, there are probably better ways to do it than equity-indexed annuities. Consider owing a mix of diversified, low-cost bond index funds to smooth out the bumps next time your equity holdings take a hit.

Also see: www.forbes.com/forbes/2008/1208/151.html

Florida annuity-sales fraud bill advances

Florida annuity-sales fraud bill advances - Investment News

Florida annuity-sales fraud bill advances
By Darla Mercado
April 2, 2009, 9:11 AM EST
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A Florida Senate bill that would levy heavy penalties on agents and financial advisers who make fraudulent annuity sales has moved closer to becoming law — though not without a few insurance industry-friendly changes.

The Safeguard our Seniors Act, or SB 1372, on Monday moved to Florida’s Policy and Steering Committee on Ways and Means, placing it a step away from a full Senate vote.

Under the bill’s original provisions, which would apply to consumers over age 65, surrender periods — the length of time the investor must hold the annuity — would have been cut to five years.

It also set the maximum surrender fees, which investors must pay for exiting the product too soon, at 5% and reduced the fee 0% by the end of the fifth policy year.

Additionally, the original bill also extended the free-look period to 60 days from the normal 14-day limit.

In its new form, however, legislators have loosened the restrictions on the annuity sales, allowing for surrender charges to go as high as 10%, with the charge to fall by one percentage point each year, so that there is no surrender fee at the end of the 10th policy year.

Under the revised bill, the surrender fee changes don’t apply to accredited investors, defined as individuals with a net worth of greater than $1 million or with an annual income of more than $200,000 in each of the past two years, or $300,000 a year in joint income.

The amended bill also cuts the free-look period to 30 days.

The original bill also made “twisting” and “churning” annuities a third-degree felony punishable by up to five years in prison. The penalty has been expanded so as to cover fraudulent conduct in connection with the sales of all financial products.

The American Council of Life Insurers in Washington, the Florida chapter of the Falls Church, Va.-based National Association of Insurance and Financial Advisors and the National Association for Fixed Annuities of Milwaukee had combined efforts to fight the early version of the bill. NAIFA-Florida had also asked state finance chief Alex Sink to consider a maximum 10-year surrender period and 10% surrender charge limit.

Still, despite the adjustments, some carriers remain displeased.

For instance, American Equity Investment Life Insurance Co. of West Des Moines, Iowa, sent its sales force an e-mail, encouraging them to reach out to their legislators and let them know how the bill would affect their businesses.

“Now, more than ever, it is important that consumers have access to annuity products that protect their principal,” president Ron Grensteiner and Nick Gerhart, vice president of compliance communications, wrote in the e-mail.

“We do not believe in limiting product design and consumer choice,” theywrote. “Let your state representative know that by limiting the surrender charge to 10 years, they will limit product design.”

What Are The Benefits Of An Annuity?

Benefits of an Annuity

Annuities are an excellent tool to help you plan
for your financial security. Fixed annuities offer a variety of benefits including
tax-deferred growth, ability to avoid probate, and lifetime income.

Tax-Deferred Growth

Tax-deferred annuity growth allows your money to grow faster because
you earn interest on dollars that would otherwise be paid as taxes. Your
principal earns interest, the interest compounds within the contract, and the
money you would have paid in taxes earns interest.

May Avoid Probate

Annuities offer the ability to name a beneficiary, which may
minimize the expense, delays, and publicity that comes with probate. Your named
beneficiary may receive death proceeds as either a lump sum or monthly income.

Lifetime Income

An immediate annuity can provide you with a guaranteed income
stream with the purchase of a tax-deferred annuity. You have the ability to
choose from several different income options, including life or a specific
period. With non-qualified plans, a portion of each income payment represents a
return of premium that is not taxable, reducing your tax
liabilities.

At McLeod Agency we understand that, depending on your
individual situation, you need the ability to choose whatever type of annuity
fits you best. With McLeod Agency, you have the ability to choose:

• Traditional Fixed Annuity – Offers a
  declared fixed interest rate that is guaranteed for a specific period and
  guaranteed to never go below a specific percentage.
  
  
• Index Annuity – Interest rate credited to
  your annuity contract is linked to specific market indices that you can choose
  on an annual basis. Once the interest is credited you are guaranteed that it can
  never go down based on future market fluctuations.
  
  
  
• Immediate Annuity – You are guaranteed an
  income stream ranging from a specific period of time to your entire life. An
  immediate annuity offers a solution to the problem of outliving your money.