Any of you that have looked at retirement investment options, have more than likely been directed to Investment products like stocks, bonds, mutual funds, or possibly variable annuities. Rarely are you given the choice of a Fixed Indexed Annuity and if it has come up in conversation you’ve probably been put off by all the negative press and those so called “advisors” that seem to have made it there sole goal in life to destroy the idea of any benefits to be had by these products. Well, let’s set the record straight.
Following is an excerpt from an article by Sheryl Moore in rebuttal to an article by Bob Carlson. Sheryl is considered an unbiased expert in Indexed annuity & life products and works closely with regulators. Her research has been presented to the National Association of Insurance Commissioners Conference on several occasions, to aid in their understanding of indexed products and provide guidance on issues such as suitability and illustrations.
I’ve not included the background in this excerpt but Ms. Moore is responding to erroneous allegations put forth by Mr. Carlson. I think you’ll get the gist of what he was asserting. More importantly this is one of the best articles (besides my own 
) that I’ve ever ready on the benefits of Fixed Indexed Annuities and why seniors are flocking to these products in droves. I hope you find it beneficial.
You are absolutely wrong that “worst case” on an indexed annuity is “a return of your principal after about 10 years and perhaps a minimum rate of return of 1% to 3%.” Indexed annuities are available with surrender charges as low as three years, so your comparison is misleading. AND worst-case scenario on the average indexed annuity is a 117% plus return at the end of a ten-year duration.
Indexed annuities have no “costs.” Indexed annuities have no explicit “costs,” like variable annuities do. The “cost” that the client pays on an indexed annuity is merely time; via a surrender charge. The surrender charge on a fixed, indexed, or variable annuity is a promise by the consumer not to withdraw 100% of their monies prior to the end of the surrender charge period. This allows the insurance company to make an informed decision on which conservative investments to use to make a return on the clients’ premium (i.e. 7-year grade “A” bonds for a seven-year surrender charge annuity or 10-year grade “A” bonds for a ten-year surrender charge annuity). Investing the consumer’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the consumer on their annuity each year. In turn, it also protects the insurance company from a “run on the money” and allows them to maintain their ratings and financial strength.
You also fail to understand that indexed annuities are a “safe money place;” not intended to be compared to risk money places such as stocks, bonds, mutual funds, variable annuities, much less the market itself. Unlike indexed annuities, risk money places put the purchaser in the position to risk loss of principal and gains in exchange for the possibility of earning double-digit gains. The individual purchasing an indexed annuity is looking for the safety of principal and gains that indexed annuities provide; such guarantees cannot be provided through risk money places. The indexed annuity purchaser’s risk tolerance is unlikely to lead them in the direction of purchasing risk money products. Therefore, the suggestion that a risk-averse individual purchase stocks and bonds is unsuitable.
In the future, it would be more appropriate to compare indexed annuities to fixed annuities and certificates of deposit (CDs).
Did you know that indexed annuity purchasers are never subject to ZERO negative returns (unlike your alternative). NO SINGLE INDEXED ANNUITY PURCHASER HAS EVER LOST A PENNY DUE TO MARKET DOWNTURN. This is a value proposition that your ‘indexed annuity alternative’ cannot provide.
Certificates of deposit are a poor alternative to indexed annuities today if purchasers are looking for safety AND accumulation. Today’s average CD rate is 0.54%. Even fixed annuities are only offering an average rate of 3.14% today. However, indexed annuities are offering the potential to earn as much as 8.90% or more today. Don’t you think your readers would appreciate having the ability to earn close to 9% while being guaranteed no less than 0% interest? Millions are more interested in THIS proposition, which is why indexed annuity sales continue to reach record-high levels each year.
I’m sorry to be the first to break it to you, Bob- there is no way that you can be “guaranteed your principal plus a minimum return after 10 years” in stocks. I certainly hope your readers take everything you say with a grain of salt. It doesn’t appear that you are qualified to advise people on investments, Mr. Carlson. Having a JD and passing the CPA do not make you qualified to offer investment advice. I suggest that you get your insurance license and become a registered representative before you attempt to speak as an authority on financial services products. Perhaps then you can get the facts straight about the products on which you purport to be an authority on.
You talk about indexed annuities’ limited gains (i.e. a ‘cap on [your] returns’) as if this is a negative feature; it is not. I think it would help if you understood the true gain potential for indexed annuities, and how they are intended to work. Indexed annuities are not intended to perform comparably to stocks, bonds, or the S&P 500 because they provide a minimum guarantee where investments do not. Indexed annuities are priced to return about 1% – 2% greater interest than traditional fixed annuities are crediting. In exchange for this greater potential, the indexed annuity has a slightly lesser minimum guarantee. So, if fixed annuities are earning 5% today, indexed annuities sold today should earn 6% – 7% over the life of the contract. Some years, the indexed annuity may return a double-digit gain and other years it may return zero interest. However, what is most likely to happen is something in between. Were the indexed interest NOT limited, the insurer could not afford to offer a minimum guarantee on the product, and THAT is a variable annuity- not an indexed annuity. On the other hand, the client is guaranteed to never receive less than zero interest (a proposition that millions of Americans are wishing they had during that period of 03/08 to 03/09) and will receive a return of no less than 117% worst-case scenario on the average indexed annuity. In addition, no indexed annuity owner has ever lost a penny as a result of market downturn. This is a strong value proposition that cannot be offered by any securities product, and the primary driver for increasing sales of these products. Hopefully this explanation will assist you in gaining greater insight into the mechanics of indexed annuities.
Despite the fact that indexed annuities have surrender charges, the purchaser does have access to their monies. The FACTS are: the average surrender charge for indexed annuities as of 3Q2010 is ten years and the average first-year charge is less than 11% (even less for older-aged purchasers). In fact, indexed annuities are available with surrender charges as little as three years and as low as 5% in the first year (declining annually thereafter). In addition, every indexed annuity permits penalty-free withdrawals of 10% of the annuity’s value annually. Some even allow as much as 50% of the annuity’s value to be withdrawn in a single year. Plus, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact that these products pay the full account value to the beneficiary upon death, and it is clear that these are some of the most liquid retirement income products available today. This is not the picture that you would paint of them, Mr. Carlson. Please take note of how liquid the products truly are.
You need to take note that indexed annuities have numerous benefits, including (but not limited to):
- No indexed annuity purchaser has lost a single dollar as a result of the market’s declines. Can you say the same for variable annuities? Stocks? Bonds? Mutual funds? NO.
- All indexed annuities return the premiums paid plus interest at the end of the annuity.
- Ability to defer taxes: you are not taxed on annuity, until you start withdrawing income.
- Reduce tax burden: accumulate your retirement funds now at a [35%] tax bracket, and take income at retirement within a [15%] tax bracket.
- Accumulate retirement income: annuities allow you to accumulate additional interest, above the premium you pay in. Plus, you accumulate interest on your interest, and interest on the money you would have paid in taxes. (Frequently referred to as “triple compounding.”)
- Provide a death benefit to heirs: all fixed and indexed annuities pay the full account value to the designated beneficiaries upon death.
- Access money when you need it: every indexed annuity allows annual penalty-free withdrawals of the account value at 10% of the annuity’s value; some even permit as much as 50% to be withdrawn in a single year. In addition, 9 out of 10 fixed and indexed annuities permit access to the annuity’s value without penalty, in the event of triggers such as nursing home confinement, terminal illness, disability, and even unemployment.
- Get a boost on your retirement: many indexed annuities provide an up-front premium bonus, which can provide an instant boost on your annuity’s value. This can increase the annuity’s value in addition to helping with the accumulation on the contract.
- Guaranteed lifetime income: an annuity is the ONLY product that can guarantee income that one cannot outlive.
In the future, I would suggest that you stick to writing about things you fully-comprehend. In the event that you do need additional resources on indexed annuity products, I am happy to serve as a fact-checking resource for you. Please, whenever you need the facts about indexed annuities, do not hesitate to contact me.
Thanks.
Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
IndexedAnnuityNerd.com
(515) 262-2623 office
(515) 313-5799 cell
I’m sure you found that enlightening. If I can help you in any way to see how this fantastic retirement planning product might fit in your portfolio, don’t hesitate to ask. My analysis doesn’t cost you a dime and could save you many thousands.
Safe Savings,
Roger H. Ely
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