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

[njh_lfg]

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.

Here are a two quick examples:

Bailout cap: company issues new contracts at lower levels than current in-force contracts to prevent the loss assets from exercising the bailout provision.

Guaranteed minimum caps: think of fixed contracts 5 or 10 years ago that had a 3% floor. Currently the carriers cannot make enough profit by offering a 3% floor so they squeeze out another 1-1.5%. This example translates to FIAs that have higher minimum part. rates/spreads/caps.

 

[scagnt83]

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.

Because the bond rates are not necessarily the same term as the IA term. They renew just like the IA rates do.

The carriers do not want to lock themselves into too much longterm, especially in such a low rate environment. Not a huge difference between a 2 and a 5 year Note these days.

Think; why would the carriers have "renewal" rates, if the underlying investments helping to fund them did not renew....

 

[KJ in Miami]

Nathan,
I got your email with the sample -- thanks! I will look over it and let you know.

 

[bluemarlin08]

scagnt83, thanks for the info. I was under the false impression that the company bought bonds that were the same length as the annuity.

 

[scagnt83]

scagnt83, thanks for the info. I was under the false impression that the company bought bonds that were the same length as the annuity.

From what I understand its a mix and depends on the length of the annuity. I would guess that the higher the guarantee the longer the term of the underlying investments...

 

[walleyeb1]

Ran across this story re: an agent that ran into big trouble selling an EIA. Interesting read curious as to others thoughts on this :

Insurance News - Advisor Convicted of Theft for Selling an Annuity

 

[Norwayguy]

Ran across this story re: an agent that ran into big trouble selling an EIA. Interesting read curious as to others thoughts on this :

Insurance News - Advisor Convicted of Theft for Selling an Annuity

Story has nothing really to do with the policy being a FIA as the case did not hinge on suitability but had everything to do with the clients dementia at the time of sale...There is a 1000+ post thread already on the forum on this exact case.

 

[nathan.lee]

Ran across this story re: an agent that ran into big trouble selling an EIA. Interesting read curious as to others thoughts on this :

Insurance News - Advisor Convicted of Theft for Selling an Annuity

If you have several hours to spare, here is the link to the thread on this forum regarding this case.

Agent Arrested and Convicted for Selling an Annuity.

 

[KJ in Miami]

Nathan,
The Hartford IA "sample" contract has no guarantees.

 

[iceco1d]

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

Thanks man. I would've responded days ago, but apparently I misbehaved.
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Yeah, This is as well written as Jack Marrion could do himself.

Thank ya...who is Jack Marrion?
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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.

That will vary by company. Some companies may structure their bond portfolios so that they buy enough bonds that they take a portion of the bond interest in future years to buy additional call options (and this amount may vary, as will the price of the calls).

Keep in mind also, the insurance company could actively trade their bond portfolio, and have capital gains to harvest, or potentially have a bond called. Not to mention, index call option prices change every second of every trading day. Depending on the time the insurer is buying, and depending on factors like market volatility, positive or negative momentum, they may be able to buy more/less option contracts per dollar.
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scagnt83, thanks for the info. I was under the false impression that the company bought bonds that were the same length as the annuity.

This is typically not the case. They are going to actively manage their general account, and look at the yield curve, interest rate trends, the length and terms of the annuity contract(s) they are issuing, etc.