How an Equity Indexed Annuity Works?

[insuranceexec]

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?

Excellent post!

 

[0b1kanobee]

There are no fees in the EIA's I sell and it is noted right there on the paperwork that goes to the third party administrator.

NO FEES! Right where it says fees I put ZERO because there isn't any.....................

All that paperwork gets sent to my office and the insurance company and if there were fees which there are not it would be a rejected app.

 

[padthaiforlunch]

And now we know why John's dad wouldn't buy an annuity from him...

 

[ThePostalGuy]

At some point, the annuity companies will have to start writting their product information in english. At this point, it might as well be Japanese to the customer.

 

[jody108]

Excellent post!

Insuranceexec, what is the advantage of a Variable Annuity over some other type of direct investment with a stock broker or other investment. Why not have the client invest directly where the insurance company makes their investment and cut out the middle man?

 

[insuranceexec]

Insuranceexec, what is the advantage of a Variable Annuity over some other type of direct investment with a stock broker or other investment. Why not have the client invest directly where the insurance company makes their investment and cut out the middle man?

Variables anuites have their place; they are just few and far between.

In the past VA's were popular due to the income riders and DB step up riders. EIA's have since adopted the same strategies, which is why we have seen the explosive popularity here in the last several years.

 

[webprez]

Here's a good way of explaining the benefits of FIA's in a relevant context:

Ask them this question:
Did You Double Your Money Over the Last 10 Years?

Then explain to them how the compound annual growth rate or annualized return for the S&P 500 Stock Index over the ten year period from 1999 to 2009 - was a negative -1.47%. Which means that $10,000 invested on the first day of 1999 would be worth only $8,600 on the first day of 2009.


That's because in 4 of those 10 years, the S&P index lost value:
losing -09.11% in 2000
losing -11.98% in 2001
losing -22.27% in 2002
losing -37.22% in 2008


However, if they had eliminated those losses, and their money had simply earned nothing (zero) during those four years - the annualized rate of return would have been better than 7% (instead of -1.47%) and their money would have doubled over that same 10 year period (instead of losing 14% of it's original value).


This type of direct, specific and factual information has been proven to pique the interest of the target market for fixed index annuities.

 

[Charpress]

Clients ask me what fees they can expect to pay for their FIA. I tell them that just like most insurance products there are no fees. The fees, expenses and any commissions are calculated into the contract along with the guarantees the insurance company is making.

All of this is heavily disclosed. Which brings me to the comment above about the insurance company's incomprehensible literature. I agree totally. However, most of the nonsense is required by regulators who have made so many demands on the insurance industry as to full disclosure that -just like everything else the government gets involved with- it no longer makes sense. If a company has to give "best market" "worst market" and "average market" hypotheticals, then the confusion just begins to start.

I will avoid giving out any insurance industry brochure since they will kill a sale every time. I blame the government principally for this, not the industry.

As for variables, my big complaint is that people get in for what they think is 7 years, or whatever, when in fact they probably bought into a lifetime commitment. Think about it. Despite all the claims of death and income benefits, you just can never get out if your balance is down -and they almost all are. So, if a variable is sold it on the basis of "Yes this is a very good product and has all these good features, but you can never get out and buy something else..." -guess where your sales would be. Now THAT would be an interesting disclosure to require in all sales brochures: "Warning. You may have to die before anyone sees the full value of this product."

 

[webprez]

Clients ask me what fees they can expect to pay for their FIA. I tell them that just like most insurance products there are no fees. The fees, expenses and any commissions are calculated into the contract along with the guarantees the insurance company is making.

All of this is heavily disclosed. Which brings me to the comment above about the insurance company's incomprehensible literature. I agree totally. However, most of the nonsense is required by regulators who have made so many demands on the insurance industry as to full disclosure that -just like everything else the government gets involved with- it no longer makes sense. If a company has to give "best market" "worst market" and "average market" hypotheticals, then the confusion just begins to start.

I will avoid giving out any insurance industry brochure since they will kill a sale every time. I blame the government principally for this, not the industry.

As for variables, my big complaint is that people get in for what they think is 7 years, or whatever, when in fact they probably bought into a lifetime commitment. Think about it. Despite all the claims of death and income benefits, you just can never get out if your balance is down -and they almost all are. So, if a variable is sold it on the basis of "Yes this is a very good product and has all these good features, but you can never get out and buy something else..." -guess where your sales would be. Now THAT would be an interesting disclosure to require in all sales brochures: "Warning. You may have to die before anyone sees the full value of this product."

HA! That is truly comical... and so true...

 

[nfsmarketing]

Good post Charpress!

Clients ask me what fees they can expect to pay for their FIA. I tell them that just like most insurance products there are no fees. The fees, expenses and any commissions are calculated into the contract along with the guarantees the insurance company is making.

All of this is heavily disclosed. Which brings me to the comment above about the insurance company's incomprehensible literature. I agree totally. However, most of the nonsense is required by regulators who have made so many demands on the insurance industry as to full disclosure that -just like everything else the government gets involved with- it no longer makes sense. If a company has to give "best market" "worst market" and "average market" hypotheticals, then the confusion just begins to start.

I will avoid giving out any insurance industry brochure since they will kill a sale every time. I blame the government principally for this, not the industry.

As for variables, my big complaint is that people get in for what they think is 7 years, or whatever, when in fact they probably bought into a lifetime commitment. Think about it. Despite all the claims of death and income benefits, you just can never get out if your balance is down -and they almost all are. So, if a variable is sold it on the basis of "Yes this is a very good product and has all these good features, but you can never get out and buy something else..." -guess where your sales would be. Now THAT would be an interesting disclosure to require in all sales brochures: "Warning. You may have to die before anyone sees the full value of this product."