Equity Index Annuity
I would like to know if the equity index annuities are any good. I have had multiple opinions, some good, some bad. On the negative side, they tie up you money to long, the cap is to low. On the positive side, they are giving a bonus, never losing the principal.
What do you think?
Permalink Submitted by Al Fry on Sat, 2008-03-29 23:28
Personally, I would look at IAs that are offered by someone that can compare with other products.
Permalink Submitted by Alvin Young on Sun, 2008-03-30 03:32
Google “equity indexed annuity” and you will get a list of stuff, one of which is this one: http://www.sec.gov/investor/pubs/equityidxannuity.htm
They sound great in principle but the devil is in the details which are buried in the 100+ pages of the prospectus. One that I did spend time reading had a paragraph that allowed them to change the terms after purchase which meant you really didn’t know what you were getting into. Since they can hire better lawyers and I have none, I decided it was an unfair contest.
A good way to find the flaws in one is to go see salesman B and tell him you are considering buying product from salesman A. B will tell you everything he can find bad about A’s product and vice versa. You will get educated rather quickly.
Permalink Submitted by Richard (Rick) Spruill on Mon, 2008-03-31 22:58
First let me state that an Equity Indexed Annuity is not a security and does not come with a prospectus. Most Insurance companies have renamed them to Fixed Indexed Annuitiy’s. I have seen some real bad Indexed annuitiy’s as was stated before. However I have also seen some really great ones. There some really good bonuses out there anywhere between 5% to 12%. It is most important for you to have an educated advisor that is licensed with many companies and knows how to explain the inner workings of these products. Yes, There is no risk to principal and the principal (Depending on product) will reset every one to 4 years. Once the principal resets, It can never go down again. There are several factors that are important on which strategies you choose in each contract. I lean towards the ones that have no caps, a 100% participation and several choices. the one I like best allows you to place your money in three different strategy’s at one time. There is an annual fee versus a cap. At the end of the year the company gives you 50% of the best performing market, 30% of the second best performing and 20% in the worst performing strategy. Based on historical look backs the average performance even with the spreads appeared to be between 7.5 & 8.6%. Keep in mind that since the principal never goes down , Clients that were in the Securitees market during the Enron scandle lost 40 to 80% of their values. It took seven years for most to get back to even. Meanwhile the clients in the Indexed Annuitees doubled their money. When is zero a hero? When everybody else is losing money and you don’t….I really like these products for folks who are retired or within five years of retirement. It took a lifetime to build up your retirement nest egg. A bad market can wipe out 50% or more of that nest egg in one year as is evidenced in the Enron era and right now for some folks…Younger folks have the time to make up for losses but a seven year down cycle can be a life sentence to a 70 year old…Think about it…:)
Permalink Submitted by Alan Spross on Mon, 2008-03-31 23:45
It can be interesting to back test a product over certain market cycles to see what it would yield. These products can be very difficult to understand, and mostly all sound better on the surface than they are in reality, or when back tested. The cost of index options to eliminate negative returns along with commissions and fees further eats into total returns over time. There are no free lunches inherent in products designed by actuaries who have access to unlimited statistics and the automation to completely test out the products prior to release.
Reinsuring insurance companies got severely burned in the 2000-2002 bear market with the inadequate reinsurance premiums collected for the death benefit exposure. In that case some policyholder’s beneficiaries and issuing companies profited from the poor judgement of the reinsuring companies, but you can be assured that those reinsurance premiums were adjusted sharply upward, with corrected costs for the coverage included in the cost of present offerings. This is the only major situation I have heard of where a policy benefit was seriously underpriced for a time to the buyer’s benefit (in that case the beneficiary).
Permalink Submitted by Tim Culbertson on Tue, 2008-04-01 00:38
Index Annuities are Fixed Annuities with an Index engine built in. They have been around since the early 90’s.
There are good and not so good, just like any product you purchase. If you want all the return of the market then you have to accept all the loss. The FIA was never designed to outperform the markets, but a place to give you potential for a higher return than a typical CD or Fixed rate Annuity.
Don’t just get duped into a bonus for the sake of it. Look for a 5-7 year FIA, that has one moving part for crediting, such as a daily average with a spread. That means that they take a reading of the index daily, and average it over the total trading days in that contract year. Add it all up and divide to give you an ending number. If that number is higher than the previous years number, that is your % of growth, minus the spread or fee.
FIA’s are not for all of your money all the time, but for some of your money part of the time. If you put monies in bonds, there tied up for period time also,There is no perfect investment or savings programs.
Tim Culbertson, Elite IRA Advisor