How an Equity Indexed Annuity Works?

[insuranceexec]

If you look at the S&P 500 over the last ten years, Feb. 1999 to Feb. 2009, it averaged -5% per year for that period.

Someone investing $100,000 in Feb. 1999 would have about $61,000 left in Feb. 2009.

On the other hand, if they had just put their money into something that even got a lousy 4% compounded for that same period of time, they would have over $155,000 now.

When you put that on a graph, the first thing you notice is that THERE WAS NOT A SINGLE DAY THE MARKET DID BETTER THAN A STEADY 4% COMPOUNDED. Very powerful stuff to show folks why they might want to avoid being in the market.

Very good post. It is good to see you back on here!

 

[Charpress]

I take time off from time to time to actually try and do some sellin'.

 

[insuranceexec]

I take time off from time to time to actually try and do some sellin'.

Well it is good to see you back on here none the less.

 

[rbrewer]

Thanks to everyone who posted. Insuranceexac that was a very informative post and will be very helpful. I hope this won't seem like a dumb question, but just so I can understand what would be some of the reasons someone would choose a fixed product over a indexed product? I understand we need to do a fact finder so what would a client tell me on it to determine a fixed product? I do have Jack Marions new book but that is more on how to sell and overcome objections rather then annuity 101. I have to fully understand what I am selling before I can recommend it. I want to help people not hurt them. I also have been hearing a lot about laddering rather than slam someone into one product and selling it on the bonus. They are saying even if the comm is lower on some products their comm overall is higher because they are getting more of the money and less buyers remorse. Please comment if you would like?

 

[DHK]

rbrewer,

Take a look at the Annuity Laddering video on this page:
The WebPrez Company

The idea is to separate the money into multiple annuities and to utilize the payout factors in the mortality tables for increasing income over time. You have some annuities that are still accumulating and some that are in the annuitization/distribution phase FOR LIFE.

Why choose a fixed product over indexed? First, what is the objective of the client? While the FIA offers the CHANCE of a higher accumulation value over the FA, perhaps the client would rather have more of a sure thing.

To me, it's purely client preference.

 

[padthaiforlunch]

Some clients want the possibility of more than the guaranteed rate of an MYGA. But as previous poster noted, it really depends on client preference. The client may want to split between the two.

Some do laddering with FIA's for the longest period. If the laddering is framed as the client having his/her original bankroll at the end of the period, then the FIA may not work and you are inviting customer dissatisfaction.

Laddering can increase commissions vs. once MYGA because the longer term MYGA pay higher than the short-term, and if you include a FIA, they pay higher commish as well.

 

[Crabcake Johnny]

4%? Take out fees, account for inflation and literally you could have put it under your matress.

 

[DHK]

Mattress? Let's see,
- your mattress LOSES money because there are NO earnings working for it.
- your mattress is subject to loss by theft (haha) or fire (or unintentional replacement by a well-meaning spouse who buys a new bed).

What fees? Annual policy fees? What fees are you talking about? Be specific.

 

[Crabcake Johnny]

EIA fees? Google it.

 

[DHK]

EIA fees? Google it.

I want you to explain it to me as though you were going to sell me one.

What fees?

Surrender charges are voluntarily paid by the contract owner to get access to more funds than the free withdrawal amount due to poor planning or emergency. Depending on the situation, these can be waived.

Participation rates (like 80% of index growth) are ONE way to guarantee that the company can keep the guarantees in the product. (So NO, you don't get 100% of the upside.)

Caps on growth? Again, that's part of the COST of keeping a guarantee! (Again, you don't get 100% of the upside.)

Why the caps & participation rates? Because the annuity company is buying options on the index. Options are cheap to buy but allow you to profit when the market goes down OR up (depending on the option). When you buy an EIA, the company buys more options on the index. This is why there are longer surrenders on EIAs than Variable Annuities. The company is spending THEIR money on the options, NOT yours. But you need to promise to keep YOUR money with THEM so they can have a chance to earn a profit.

Note: If options were purchased directly with the amount deposited to the annuity, then they SHOULD be classified as a security because the annuity OWNER is owning the index options within their contract. That is not the case. The annuity COMPANY is buying the options.

Do the fees (caps & participation rates) interfere with your principal growth? NO!!!

Unlike with a VARIABLE annuity, those M&E charges and portfolio management expenses affect your investment balances on a daily basis and have a compounding affect on your return EVEN with a zero gain in the market!

Do caps & participation rates hinder your account from "Maximum growth"? Yes BECAUSE you have a MINIMUM GUARANTEE.

If you want maximum growth and participation without caps or participation rates, then you will want a VARIABLE annuity where you won't have a minimum guarantee, but you can have all the upside that your investments get.

So again, WHAT FEES are there that affect the policyholder's principal balance? Hmmm?