Indexed Annuities

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Nov 24, 2008 2:48 pm

I've spent a little time looking into indexed annuities, primarily JNL's, and I think they might be one of the most misunderstood products out there.


I realize they are sometimes sold inappropriately, but the way I see them fitting into my practice is for a portion of intermediate term money for a client that doesn't need market returns thereby not taking market risk.
 
When I was very close-minded about indexed annuities, it was because I thought clients were locked in too long and the returns were terrible.
 
The fact is being locked in for 5 years isn't that bad and I was misrepresenting who this product is for, so the returns shouldn't be an issue.
 
So my question is, if you don't like indexed annuities, what about them don't you like?  What am I missing?
 
 
Nov 24, 2008 2:59 pm

i have no problem with index annuities, don't sell them, but again, they are not all bad, all the time.  they have a fit if used correctly.  trouble is, the most publicity goes to those brokers who sell them as the ONE investment a 60 year old widow needs and oh yeah, they have a 20 year surrender schedule.


 
they are too often sold as a variable product, meant to compete with a variable product, which they are not.  i think they can definitely be used, but the "hassles" associated with them often shy many reps away. 
Nov 24, 2008 4:25 pm

Appropriate for an 80 year old woman who needs income?

Nov 24, 2008 4:34 pm
BondGuy:

Appropriate for an 80 year old woman who needs income?

 
Is this a rhetorical question? 
 
 
Nov 24, 2008 4:44 pm

No, a friend called and told me one of his clients was going to liquidate her account to buy an indexed annuity. He said the ins guy called with the client on a conference call to liquidate the account. For his part he told the client that indexed annuities were an inappropriate investment for her. He advised her not to lock in her losses by selling.

 
As for me, i don't know enough about indexed annuities to know if they are right for an 80 year old who needs income. That's why I asked.
Nov 24, 2008 5:41 pm
BondGuy:

No, a friend called and told me one of his clients was going to liquidate her account to buy an indexed annuity. He said the ins guy called with the client on a conference call to liquidate the account. For his part he told the client that indexed annuities were an inappropriate investment for her. He advised her not to lock in her losses by selling.

 
As for me, i don't know enough about indexed annuities to know if they are right for an 80 year old who needs income. That's why I asked.
 
From what I've seen, I don't believe it is a good vehicle at all if you're taking income.  Who knows if it's good or not without details, but I would venture to guess for an 80 year old lady, unless it was money she was not intending to draw income from, I wouldn't personally do that.
 
I think it could be a great product if you're 58 and retiring in 2 years and want to be assured there is a specific amount of money available in 5 years in case the market went down 45% (oops).  You can use it as part of a bucket approach where a certain portion of lower risk assets is guaranteed.
Nov 24, 2008 6:05 pm

Bond Guy, do you understand fixed annuities?  If you do, then you also understand equity indexed annuities.  The only difference is how interest is credited.  Both products have guaranteed minimum interest rates.  The interest rate that a traditional fixed annuity pays will typically be predicated on the general interest rate environment.  An EIA will pay based upon changes in some sort of index.  In both cases, the actual money is invested with the insurance company and not in a separate account.


Other than Bobby, most people here will probably agree that the problem with them is that they are so often sold in an inappropriate manner. 


My opinion is that they make sense in any situation that a fixed annuity makes sense.  If a fixed annuity is right for the situation and the person wants the possibility of outperforming a fixed annuity in exchange for the risk of underperforming one while still guaranteeing a positive result, an EIA may be a good choice.

Nov 24, 2008 7:00 pm
BondGuy:

No, a friend called and told me one of his clients was going to liquidate her account to buy an indexed annuity. He said the ins guy called with the client on a conference call to liquidate the account. For his part he told the client that indexed annuities were an inappropriate investment for her. He advised her not to lock in her losses by selling.

 
As for me, i don't know enough about indexed annuities to know if they are right for an 80 year old who needs income. That's why I asked.



If you guys don't sell your clients annuities, someone else will. LOL!!!

Nov 24, 2008 8:00 pm

They are evil and anyone who sells them in ANY situation is a crook.  I know this becasue Jim Weddle told me so.

Nov 25, 2008 11:44 am

Fixed indexed annuities are the gentler, kinder name recently given to EIAs. The insurance companies received so much negative publicity with the inappropriate sales of equity indexed annuities that they just changed the product's name.

 
The problem with FIAs is that the insurance company can change the minimum guaranteed rate, the participation rates, the caps, etc., on an annual basis, and there ain't a thing anyone can do about it. Also, their surrender schedules are horrendous. They were designed for no other reason than to make insurance companies, and their agents, rich.
 
An insurance company takes premiums and invests them in fixed income investments. Their profits are derived from the difference in their investment earnings less what they're paying their customers in interest. So, it follows that an FIA will provide a fixed income-like return, minus the fees the insurance company keeps.
 
Why not just buy a corporate, muni or zero-coupon instead and avoid all the headaches?
 
Oh, never mind, I forgot about the HUGE difference in commissions the FIAs pay versus anything else. If the commissions were reduced to the level of mutual funds or bonds, sales would dry up completely.
Nov 25, 2008 12:03 pm
Borker Boy:

Fixed indexed annuities are the gentler, kinder name recently given to EIAs. The insurance companies received so much negative publicity with the inappropriate sales of equity indexed annuities that they just changed the product's name.

 
The problem with FIAs is that the insurance company can change the minimum guaranteed rate, the participation rates, the caps, etc., on an annual basis, and there ain't a thing anyone can do about it. Also, their surrender schedules are horrendous. They were designed for no other reason than to make insurance companies, and their agents, rich.
 
An insurance company takes premiums and invests them in fixed income investments. Their profits are derived from the difference in their investment earnings less what they're paying their customers in interest. So, it follows that an FIA will provide a fixed income-like return, minus the fees the insurance company keeps.
 
Why not just buy a corporate, muni or zero-coupon instead and avoid all the headaches?
 
Oh, never mind, I forgot about the HUGE difference in commissions the FIAs pay versus anything else. If the commissions were reduced to the level of mutual funds or bonds, sales would dry up completely.
 
The FIA isn't invested in fixed income.  In one I've looked at, you are invested in 100% equities.  If the returns appear to be like fixed income returns, it's because of the caps. 
 
The client I look for would have about $1MM-$3MM to invest and is within 5 years of retiring.  I can't tell you how many of these people I come across that stress they want guarantees.  My only regret was not giving them more in the way of guaranteed products, instead I wanted to be the manager of the funds, kind of like the wirehouse mentality from when I was there.  But I digress.
 
Anyways, with the FIA I like, the maximum the client could get in one year is 17%.  In 1933 and 1935, the market was up over 50% in each of those years.  That's what it would take to acheive that 17%.  Given that the FIA is for more conservative investors, I would set client expectations at no more than 6%.  
 
And remember, for the people I'm looking for, they don't need more than 6%, they've already made it.  Why take the risk?
Nov 25, 2008 12:10 pm

Then why not recommend a 10 yr. 6% traditional fixed-rate annuity (they do exist)? Oh, that's right....the commission is only reasonable, not ridiculous, on those products. There's really no other answer. Why would your hypothetical client "risk" earning less than 6% when he could have the 6% "guaranteed" as well?

Nov 25, 2008 12:14 pm

Or, how about this, even better:
Protective – ProSaver Platinum
Rate Structure: 6.20% for 7 years (6.45% for deposits 100K+)
CDSC: 6,6,5,4,3,2,1%

Nov 25, 2008 12:15 pm
YHWY:

Then why not recommend a 10 yr. 6% traditional fixed-rate annuity (they do exist)? Oh, that's right....the commission is only reasonable, not ridiculous, on those products. There's really no other answer. Why would your hypothetical client "risk" earning less than 6% when he could have the 6% "guaranteed" as well?

 
Who said I wouldn't do both?  I like to diversify amongst different products and investments.  If you have $1MM, why not have 10% in a fixed annuity, 10% in an indexed annuity, 25% in a variable annuity, 10% in cash, and 45% in a managed account with funds/etf's/stocks/bonds?
 
Personally right now, I'm not too much of a fan of fixed annuities given that interest rates sooner or later can't go any lower.
Nov 25, 2008 12:16 pm

Because your clients "stress they want guarantees".

Nov 25, 2008 12:19 pm
"And remember, for the people I'm looking for, they don't need more than 6%, they've already made it.  Why take the risk?"
 
45% in a managed account with funds/etf's/stocks/bonds?
Nov 25, 2008 12:24 pm
Borker Boy:
"And remember, for the people I'm looking for, they don't need more than 6%, they've already made it.  Why take the risk?"
 
45% in a managed account with funds/etf's/stocks/bonds?
 
I'm just throwing out an example of different buckets.  It's not for any one client inparticular. 
 
There are a couple things I am taking away from this financial mess.  1.  I wasn't allocated across every asset class I should have been.  2.  More in the way of product diversification would have cut the losses significantly.
 
Going forward, both of those errors can be corrected. 
Nov 25, 2008 12:32 pm

snaggletooth: "The FIA isn't invested in fixed income.  In one I've looked at, you are invested in 100% equities."
 If that is really the case, then that is the only one of its kind I've ever heard of. Every EIA (or whatever the new handle is, FIA, whatever) ARE, in fact fixed annuities. The interest rate paid is based on growth of a particular index, with, as you've mentioned caps and "participation rates" muddying that interest calculation. Unless you've discovered a completely new product, your lack of product knowledge is scary.

Nov 25, 2008 12:37 pm
YHWY:

snaggletooth: "The FIA isn't invested in fixed income.  In one I've looked at, you are invested in 100% equities."
 If that is really the case, then that is the only one of its kind I've ever heard of. Every EIA (or whatever the new handle is, FIA, whatever) ARE, in fact fixed annuities. The interest rate paid is based on growth of a particular index, with, as you've mentioned caps and "participation rates" muddying that interest calculation. Unless you've discovered a completely new product, your lack of product knowledge is scary.

 
Maybe your lack of knowledge is scary.  I know what I'm looking at.
Nov 25, 2008 12:38 pm

May I have the name of the product, please?