Equity Indexed Annuities: Are they the real deal or junk products?

[Larry Tew]

Re: Equity Indexed Annuities: Are they the real deal or junk pro

It's always the companies teetering on the brink of insolvency that have the best deals.

 

[KJ in Miami]

Re: Equity Indexed Annuities: Are they the real deal or junk pro

If you believe the rates are going up, why not use a VA?

I would disagree.

Locking yourself into a fixed 3.3% does not allow you to benefit once the fed increases rates (it will happen in the next 10 years).

But with the IA, caps will most likely go up when rates do.


Locking in a long term low interest rate is not a smart move for most in this economic climate (imo).

And with a 10 year commitment I could get a 6% yearly cap with Midland.

Hell, I can get 4% caps on Great Americans 6 year product... & it has a bailout cap of 3.5%....

I get a lot more excited about that than 3.3% for 10 years...
- - - - - - - - - - - - - - - - - -


NA.

Sentinel is offering 3.8% for 10 years, but thy are B+++ rated.

 

[0b1kanobee]

Re: Equity Indexed Annuities: Are they the real deal or junk pro

If you believe the rates are going up, why not use a VA?

Because a VA doesn't use rates silly!

 

[KJ in Miami]

Re: Equity Indexed Annuities: Are they the real deal or junk pro

If rates are going up typically then so too is the market. The market generally keeps up with inflation -- that was my reason for asking bud!

I still love your "dead" money presentation!

Because a VA doesn't use rates silly!

 

[iceco1d]

Re: Equity Indexed Annuities: Are they the real deal or junk pro

If rates are going up typically then so too is the market. The market generally keeps up with inflation -- that was my reason for asking bud!

I still love your "dead" money presentation!

Rising rates do not necessarily mean the stock market is going up. Rising rates WILL however negatively affect bonds, which most VA contracts I've written have 30 - 40% of their money in bond funds. In fact, some VA contracts require at least 20 - 40% in bonds.

Most important though, FIAs and VAs aren't, or at least shouldn't, be competing products.

FIAs are for people that do not want to lose any money, but are willing to risk getting no interest, in exchange for the possibility of getting more interest than they could in a CD or a plain vanilla fixed annuity.

VAs are for people that are gun shy about the market, but would be willing to continue as an investor, so long as they have a backstop (like a GMAB or GMIB).

You wouldn't switch the FIA investor to a VA because of interest rates and/or your perceived change in the stock market, anymore than you'd sell out all of your grandmothers municipal bonds, and purchase dividend paying stocks, because you perceive a change in the market.

Two different tools, for two different clients.

One other note: As interest rates rise, FIA caps will likely rise along with them.

 

[KJ in Miami]

Re: Equity Indexed Annuities: Are they the real deal or junk pro

Thanks for the insight - one question. Are not IA's sold that you get to gain from the index? I am trying to understand why someone would go into a product and am not trying to argue. I agree that rising interest rates "do not necessarily mean...," but I must have a totally wrong understanding of IA's then. Are they not tied to an market index one way or the other? If that is true, then the market affects IA's and not the interest rates unless they affect them in the way I explained?

I think that your last comment/note is just conjecture (no offense intended). I do appreciate the dialogue and it just sharpens my skills.

I would think that at least with a CD or Fixed Annuity at least would give a return verse a IA. In my market, IA's are sold as competing products to a VA. I spoke with a guy who made very little from an IA. Therefore, annuities were a four letter word to him. This guy was a wealthy man. One time speaking with a friend of mine who is an attorney, an independent Agent came in and told him about an IA with a 8% income guarantee. You may not sell an IA as a competing product, but you are definitely one of the VERY few. I know of a Mass Mutual lady (I do not work with Mass and do not agree with what she did) who had a client from a CPA referrral. She was deciding between a VA & IA. in the end, she went with a IA as the commission was better. Her words not mine. Please share with me how you sell them? What percentage GENERALLY do you think they should have in a IA contract?

I would like to get a hold of a "sample" IA contract to see for myself. Can you share with me a scenario that you feel would be great to put someone into an IA? Thanks man!!

Rising rates do not necessarily mean the stock market is going up. Rising rates WILL however negatively affect bonds, which most VA contracts I've written have 30 - 40% of their money in bond funds. In fact, some VA contracts require at least 20 - 40% in bonds.

Most important though, FIAs and VAs aren't, or at least shouldn't, be competing products.

FIAs are for people that do not want to lose any money, but are willing to risk getting no interest, in exchange for the possibility of getting more interest than they could in a CD or a plain vanilla fixed annuity.

VAs are for people that are gun shy about the market, but would be willing to continue as an investor, so long as they have a backstop (like a GMAB or GMIB).

You wouldn't switch the FIA investor to a VA because of interest rates and/or your perceived change in the stock market, anymore than you'd sell out all of your grandmothers municipal bonds, and purchase dividend paying stocks, because you perceive a change in the market.

Two different tools, for two different clients.

One other note: As interest rates rise, FIA caps will likely rise along with them.

 

[iceco1d]

KJ:

1. Interest crediting on an indexed annuity is tied to a stock index (i.e. if it goes up, you get interest). But the caps, participation rates, and spreads (I'm assuming you know what they are), are determined LARGELY by interest rates.

The reason for that, is because MOST of the premium you deposit goes to the insurers general account to purchase bonds. This is how the insurer makes sure they can return the clients money, plus the minimum guaranteed rate (just like they do with a regular fixed annuity). The remainder (after commissions and insurer profits) goes to buy index call options.

The reason interest rates are relevant, is because if rates are low, and the insurer is buying bonds paying say, 3%, they must use a larger portion of the client deposit to buy bonds. Which means, they have less money to buy call options. Fewer call options means less appreciation when the market goes up, which means the insurer can only credit maybe 4% interest to the contract.

When interest rates go up, the insurer doesn't need to use as much of the premium to purchase bonds to insure the return of the clients premium, and therefore has more money left over to purchase call options. More call options equals more appreciation if the market goes up. More appreciation means the insurer can give the client more interest.

This is why interest rate caps/spreads/participation rates are subject to change.

So the amount of interest that can be POTENTIALLY credited, is determined (mostly) by prevailing interest rates. Whether or not interest is actually credited, is determined by the stock market.

I could build an indexed annuity, tied to a roulette wheel. I would make an 8 year contract. Take maybe $90K (out of $100K) and put it in a portfolio of bonds yielding 3 - 4%. Then put the remaining $10K on black (or red, or whatever). If I win t roulette, the client gets "interest." If I lose, the client just gets their money back (fueled by the bond portfolio at the end of the surrender period).

This is why I say there is no "smoke and mirrors" in the contract itself. It's a logical and viable investment strategy that most investors (and advisors) can't do for themselves (due to knowledge, or costs, or both).

The bonuses are just bullshit to sell contracts. Where they giveth, they taketh away.

Now, as for when you sell a FIA or a VA, that's not the products fault. That is the advisor/agents fault. Abusive selling occurs all the time with mutual funds, annuities, stocks, bonds, you name it. You can't blame the product though for what a foolish or greedy advisor/agent does.

As for commissions, I cannot think of a single FIA that pays better commissions than a typical VA. Some FIAs pay similarly to a B-share VA, but there is not a FIA in existence that pays like an L-share VA, and I will GUARANTEE you that.

Also note, FIAs do have a minimum guaranteed rate (usually of about .75% - 1.00% these days). So getting "nothing" is not the case either.

I do not have a predetermined percentage that a client should put in a FIA. That varies from client to client, and MOST of my clients do not even own a FIA at all. It just depends on what your clients risk tolerance is, and what their objective is.

Finally - you asked for a scenario where a FIA would be a good choice. I think I gave you one in my last post (hypothetical scenario). I'm not sure what you're asking for there, you'll have to elaborate.

Oh, and I'm not the one that offered to send a sample contract. I'm not willing to send one of my clients contracts, because that could be career suicide. A secondly, I just don't care that much. If someone wants a contract, they can call any insurer and get one.

 

[nathan.lee]

KJ:

1. Interest crediting on an indexed annuity is tied to a stock index (i.e. if it goes up, you get interest). But the caps, participation rates, and spreads (I'm assuming you know what they are), are determined LARGELY by interest rates.

The reason for that, is because MOST of the premium you deposit goes to the insurers general account to purchase bonds. This is how the insurer makes sure they can return the clients money, plus the minimum guaranteed rate (just like they do with a regular fixed annuity). The remainder (after commissions and insurer profits) goes to buy index call options.

The reason interest rates are relevant, is because if rates are low, and the insurer is buying bonds paying say, 3%, they must use a larger portion of the client deposit to buy bonds. Which means, they have less money to buy call options. Fewer call options means less appreciation when the market goes up, which means the insurer can only credit maybe 4% interest to the contract.

When interest rates go up, the insurer doesn't need to use as much of the premium to purchase bonds to insure the return of the clients premium, and therefore has more money left over to purchase call options. More call options equals more appreciation if the market goes up. More appreciation means the insurer can give the client more interest.

This is why interest rate caps/spreads/participation rates are subject to change.

So the amount of interest that can be POTENTIALLY credited, is determined (mostly) by prevailing interest rates. Whether or not interest is actually credited, is determined by the stock market.

I could build an indexed annuity, tied to a roulette wheel. I would make an 8 year contract. Take maybe $90K (out of $100K) and put it in a portfolio of bonds yielding 3 - 4%. Then put the remaining $10K on black (or red, or whatever). If I win t roulette, the client gets "interest." If I lose, the client just gets their money back (fueled by the bond portfolio at the end of the surrender period).

This is why I say there is no "smoke and mirrors" in the contract itself. It's a logical and viable investment strategy that most investors (and advisors) can't do for themselves (due to knowledge, or costs, or both).

The bonuses are just bullshit to sell contracts. Where they giveth, they taketh away.

Now, as for when you sell a FIA or a VA, that's not the products fault. That is the advisor/agents fault. Abusive selling occurs all the time with mutual funds, annuities, stocks, bonds, you name it. You can't blame the product though for what a foolish or greedy advisor/agent does.

As for commissions, I cannot think of a single FIA that pays better commissions than a typical VA. Some FIAs pay similarly to a B-share VA, but there is not a FIA in existence that pays like an L-share VA, and I will GUARANTEE you that.

Also note, FIAs do have a minimum guaranteed rate (usually of about .75% - 1.00% these days). So getting "nothing" is not the case either.

I do not have a predetermined percentage that a client should put in a FIA. That varies from client to client, and MOST of my clients do not even own a FIA at all. It just depends on what your clients risk tolerance is, and what their objective is.

Finally - you asked for a scenario where a FIA would be a good choice. I think I gave you one in my last post (hypothetical scenario). I'm not sure what you're asking for there, you'll have to elaborate.

Oh, and I'm not the one that offered to send a sample contract. I'm not willing to send one of my clients contracts, because that could be career suicide. A secondly, I just don't care that much. If someone wants a contract, they can call any insurer and get one.

Quite possibly the best post within this conversation which has now covered 3 different threads.

Thanks Ice.

Edit: Oops...I was wrong. I think this conversation has spread to at least 5 or 6 different threads. haha

 

[Bobrobb]

KJ:

1. Interest crediting on an indexed annuity is tied to a stock index (i.e. if it goes up, you get interest). But the caps, participation rates, and spreads (I'm assuming you know what they are), are determined LARGELY by interest rates.

The reason for that, is because MOST of the premium you deposit goes to the insurers general account to purchase bonds. This is how the insurer makes sure they can return the clients money, plus the minimum guaranteed rate (just like they do with a regular fixed annuity). The remainder (after commissions and insurer profits) goes to buy index call options.

The reason interest rates are relevant, is because if rates are low, and the insurer is buying bonds paying say, 3%, they must use a larger portion of the client deposit to buy bonds. Which means, they have less money to buy call options. Fewer call options means less appreciation when the market goes up, which means the insurer can only credit maybe 4% interest to the contract.

When interest rates go up, the insurer doesn't need to use as much of the premium to purchase bonds to insure the return of the clients premium, and therefore has more money left over to purchase call options. More call options equals more appreciation if the market goes up. More appreciation means the insurer can give the client more interest.

This is why interest rate caps/spreads/participation rates are subject to change.

So the amount of interest that can be POTENTIALLY credited, is determined (mostly) by prevailing interest rates. Whether or not interest is actually credited, is determined by the stock market.

I could build an indexed annuity, tied to a roulette wheel. I would make an 8 year contract. Take maybe $90K (out of $100K) and put it in a portfolio of bonds yielding 3 - 4%. Then put the remaining $10K on black (or red, or whatever). If I win t roulette, the client gets "interest." If I lose, the client just gets their money back (fueled by the bond portfolio at the end of the surrender period).

This is why I say there is no "smoke and mirrors" in the contract itself. It's a logical and viable investment strategy that most investors (and advisors) can't do for themselves (due to knowledge, or costs, or both).

The bonuses are just bullshit to sell contracts. Where they giveth, they taketh away.

Now, as for when you sell a FIA or a VA, that's not the products fault. That is the advisor/agents fault. Abusive selling occurs all the time with mutual funds, annuities, stocks, bonds, you name it. You can't blame the product though for what a foolish or greedy advisor/agent does.

As for commissions, I cannot think of a single FIA that pays better commissions than a typical VA. Some FIAs pay similarly to a B-share VA, but there is not a FIA in existence that pays like an L-share VA, and I will GUARANTEE you that.

Also note, FIAs do have a minimum guaranteed rate (usually of about .75% - 1.00% these days). So getting "nothing" is not the case either.

I do not have a predetermined percentage that a client should put in a FIA. That varies from client to client, and MOST of my clients do not even own a FIA at all. It just depends on what your clients risk tolerance is, and what their objective is.

Finally - you asked for a scenario where a FIA would be a good choice. I think I gave you one in my last post (hypothetical scenario). I'm not sure what you're asking for there, you'll have to elaborate.

Oh, and I'm not the one that offered to send a sample contract. I'm not willing to send one of my clients contracts, because that could be career suicide. A secondly, I just don't care that much. If someone wants a contract, they can call any insurer and get one.

Yeah, This is as well written as Jack Marrion could do himself.

 

[bluemarlin08]

That was an excellent description. My question, understanding your explanation, I can see where the price of the bond drives how much is left over to buy the options and how the caps and participation rates are pegged initially, but how could a scenario present itself that an in force policy could have higher credit rates in the future.