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

[iceco1d]

So do the companies purchase one year call option or the length of the annuity call options. Do they repurchase options every year, if so, how do they reserve the amount needed to purchase future calls?

This will vary depending on the crediting method(s) chosen by the client.

One thing to note though, is that call options that match the length of most annuity contracts don't exist. Most call options expire in 3 months. Some contracts, called LEAPS, last a year plus, but I'm not aware of any that last much longer than that (aside from options granted in ESOPs to employees, and those can't be purchased on the secondary market by insurers anyway).

 

[indexedannuity_girl]

Rather than "will" don't you mean "might".
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I think "should" would be a better descriptor. sjm
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Non-indexed (declared-rate) deferred annuities seem likely to produce stronger long-term results than indexed, if the index is the only difference. FIA must divert some of the premium to purchase hedges against the stock index, which cannot be converted to credited interest. If the commissions are the same or higher, that also weakens the FIA product as compared with declared-rate S/FPDA.

But some people are attracted to the allure of stock index growth. If that gets them to put more money aside toward their future, that offsets the potential disadvantage of diverted dollars. Most save too little, including me.

Actually, the indexed annuity should outperform the fixed. Both fixed and indexed products are driven off of the 10-year treasury. Where fixed annuities are averaging rates of only 2.06%, indexed annuities are offering more potential on average. The participation rates/caps/spreads are still not very attractive on indexed annuities today. However, they are relatively competitive vs. other "safe money" retirement products. sjm
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This is what I dont agree with.

Yes, the IA does not have as much to go towards guaranteed interest, but the whole point is that the portion going to the options has the ability to perform better than if it had went to Guaranteed Interest Crediting. It is just dependent upon the chosen Index.

You speak as if the client is doomed to never receive any Indexed Crediting, which is false.

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This part I actually agree with (for IAs, not IULs), BUT, only because of current market conditions.

Currently, you can get a 10 year FA at 4.25%. There is no 10 year IA that I know of that has a 4.25% cap.

So yes, in this current (artificial) economic environment FAs often look more attractive than IAs if an Income Rider is not warranted.

But historically IAs have given the opportunity for growth a bit above a FA.

There are actually 10-year indexed annuities with caps as high as 6.05% on annual point-to-point strategies today. sjm
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But what are the chances over the next 10 years that FIA contracts issued today won't see their caps move over 4.25%?

The chances of caps on indexed annuities INCREASING once the product is inforce are practically nil. The bonds that back the guarantees on the products really don't permit insurance companies to renegotiate rates after the policy is issued; they are locked-into those bonds until they mature and can't take advantage of more attractive bond rates on policies that have already been issued. sjm
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"Speculation" is not permitted in general account products, including FIAs, so only foolish carriers would try it. Investments backing FIAs are the same as those for SPDAs. Derivatives (stock index hedges) purchased with part of the FIA premium take away from the amount available for those investments.

The policyholder purchasing an FIA is not directly purchasing the options; they are still protected by the general account. However, the insurance carrier is purchasing options to provide the index-linked interest on the products, which are speculative.

That being said, just because an insurance company invests their monies in real estate, does not mean their policyholders are exposed should the real estate market collapse.

Hope this helps. sjm
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You're wrong. A hedge is used to reduce exposure to risk.

For example, buying AAPL stock at $550, and then buying put options with a strike of $525 is a HEDGE. Hedging reduces, but doesn't eliminate, risk.

That is not what FIA companies are doing when they design an EIA contract. They investing whatever amount is necessary in BONDS to provide a) agent commissions, b) guaranteed minimum interest rate, and c) cover insurer expenses and leave them some profit.

Whatever amount is left over after completing those functions, is invested into purchasing call options on an equity index. The options are purchased "naked." They are not married puts, or covered calls. They are purely naked calls, that will increase drastically in value if the market in question goes UP and expires WORTHLESS if the market in question stays the same, or goes down. It is a speculative play to see if the contract is credited with additional (indexed) interest.

It is absolutely not a hedge.

GREAT explanation. Here is an article that explains the process in a little more detail: Indexed Annuity Magic: How Do They Do It?. sjm

 

[scagnt83]

There are actually 10-year indexed annuities with caps as high as 6.05% on annual point-to-point strategies today. sjm
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Then tell us who! We arent shy on this forum, we call companies out around here... !

 

[nathan.lee]

Then tell us who! We arent shy on this forum, we call companies out around here... !

Midland National's Select Series (5%) 10 has a 6.05% cap on the 1 year Dow Jones Eurostoxx 50 pt. to pt. The cap rate is only available on the high band which starts at $250K.

SJM...is this the product and crediting method to which you were referring?

I attached the latest spec sheet from our site.

 

[scagnt83]

Midland National's Select Series (5%) 10 has a 6.05% cap on the 1 year Dow Jones Eurostoxx 50 pt. to pt. The cap rate is only available on the high band which starts at $250K.

SJM...is this the product and crediting method to which you were referring?

I attached the latest spec sheet from our site.

Nice to know. Thanks Nathan!


OK, so here is the question of the day:
Is the Euro50 positioned better than the S&P or Dow to grow over the next 5-10 years?

I actually think it might be a good play. If you look at the 5 year chart the Euro50 is down a considerable amount. And I dont think Europe will vanish into oblivion, so its bound to rise (possibly a good bit) over the next 5-10 years.

Conversely, US stocks imo are overvalued considering current economic factors. I dont see room for a lot of growth over the next 5 years in US equities, at least not on a broad scale.

Thoughts?

How many of you out there are using the Euro50 for a crediting method these days?

 

[Norwayguy]

Nice to know. Thanks Nathan!

OK, so here is the question of the day:
Is the Euro50 positioned better than the S&P or Dow to grow over the next 5-10 years?

I actually think it might be a good play. If you look at the 5 year chart the Euro50 is down a considerable amount. And I dont think Europe will vanish into oblivion, so its bound to rise (possibly a good bit) over the next 5-10 years.

Conversely, US stocks imo are overvalued considering current economic factors. I dont see room for a lot of growth over the next 5 years in US equities, at least not on a broad scale.

Thoughts?

How many of you out there are using the Euro50 for a crediting method these days?

Your forgetting the fact that the carrier can change the caps by different amounts on each index to keep things relatively even.
I'm rethinking my stance on long term product like ANICOs Valuelock because everything is set in stone once the policy is issued.

 

[GaInsProf]

The Blended Index Option is a good one from past performances, though some of the big carriers are looking at replacing the European with some other Index, such as some Asian Indexes. Plus one big carrier is looking at 5 year caps that will be higher as they can buy 5 year options instead of 1 years. The thing I like about FIA's is the insurance companies are always scrambling to maintain some level of competition. But IMO, the real deal for these products is not necessarily the the cap rates, but the Roll-overs...I mean really aren't these products really benefitting the conservative folks who worry about outliving their money? At least that's how I position them.

Also, either North American or American Equity has a chart showing the past 20 years Index performances and it's all over the board which one is best- I can scrounge that up if anyone wants to look at it.

 

[scagnt83]

Also, either North American or American Equity has a chart showing the past 20 years Index performances and it's all over the board which one is best- I can scrounge that up if anyone wants to look at it.

I wouldnt mind seeing it.

 

[GaInsProf]

You sir are in luck, my scrounging talents haven't been lost- It's North American and it shows the rankings back to 1995. Post an email addy or email me here, as poor ol me, I don't have 20 posts yet to enable me to email you internally. I have scanned a copy in color so you can easier navigate the chart.

 

[nathan.lee]

You sir are in luck, my scrounging talents haven't been lost- It's North American and it shows the rankings back to 1995. Post an email addy or email me here, as poor ol me, I don't have 20 posts yet to enable me to email you internally. I have scanned a copy in color so you can easier navigate the chart.

Prof,

I went ahead and attached the North American Flip Chart for everyone. Page 13 of 18 has the Periodic Chart of Indices to which you were referring.