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

[GaInsProf]

Cool, u da man..ad now, next post I will have arrived at the magic 20 wheeee!

 

[scagnt83]

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.

Thanks Nathan/GaIns
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[JMO Fan]

I think "should" would be a better descriptor. sjm
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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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"driven off the 10-year treasury" is a gross over-simplification. They're both driven off the typical investments of the general account, usually long-term bonds.

...

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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well said

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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My point is that the money spent on the stock index options is money diverted from the fundamental basis for cash value increases, i.e., the bond investments. In addition, any commission on FIA that exceeds the commission on a non-indexed annuity further diverts money away from the cash available for investments. Unless the company tilts its expenses in favor of FIAs (and thus cheats the other general account policyholders), the non-indexed annuity wins long-term.

The drunken sailor can always be an exception. But not everybody can be above average.

 

[Norwayguy]

Here is what I don't get FIAs guarantees are derived by the long term bonds held in the general account and I get that the carriers can not renegotiate the bonds which is why caps going up on an issued policy is almost nil. I also get that FIAs pay higher commissions having said all that why do the caps drop after issue if nothing is changing in the bonds, commission is paid etc.

 

[scagnt83]

having said all that why do the caps drop after issue if nothing is changing in the bonds, commission is paid etc.

Ditto.
Logic would say that they are not totally buying investments/bonds for the exact same time period... especially considering the liquidity of bonds on the secondary market... me thinks they are trading them..
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"driven off the 10-year treasury" is a gross over-simplification. They're both driven off the typical investments of the general account, usually long-term bonds.

But the GA is very heavy on the treasuries usually is it not? Rates are indicative of that fact it seems.
The current AAA 10y corporate composite is around 4% right now. If the GA was heavy on those, then rates would be a bit different... dont you think?

 

[0b1kanobee]

Here is what I don't get FIAs guarantees are derived by the long term bonds held in the general account and I get that the carriers can not renegotiate the bonds which is why caps going up on an issued policy is almost nil. I also get that FIAs pay higher commissions having said all that why do the caps drop after issue if nothing is changing in the bonds, commission is paid etc.

Keep in mind that bond values are still subject to interest rate risk.

Why Bond Prices Go Up and Down

 

[Norwayguy]

Keep in mind that bond values are still subject to interest rate risk.

Why Bond Prices Go Up and Down

Only if your trading the bonds, if you hold them to maturity then you get the last coupon plus the amount of the bond back. Also in a falling interest rate environment the bonds you currently hold for a higher interest rate should fetch a premium. I think it disengenous to say the rates can't go up because the company locks in on bonds and in the next breath they cut caps on existing policies which should have no volativity if the carrier is holding bonds to maturity.

 

[scagnt83]

I think it disengenous to say the rates can't go up because the company locks in on bonds and in the next breath they cut caps on existing policies which should have no volativity if the carrier is holding bonds to maturity.

I agree totally.
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[0b1kanobee]

Only if your trading the bonds, if you hold them to maturity then you get the last coupon plus the amount of the bond back.

So you are saying they always hold them to maturity thus dismissing interest rate risk? Another words insurers always hold them to maturity is what you are saying?

 

[Norwayguy]

So you are saying they always hold them to maturity thus dismissing interest rate risk? Another words insurers always hold them to maturity is what you are saying?

No I'm not. But the carriers say caps can not go up on an issued policy because they buy long term bond obligations so how do they with a straight face lower caps.