How an Equity Indexed Annuity Works?

[KJ in Miami]

Are not IA tied to the S&P Index? Maybe they added the another one.

Your argument about the s&p down 20% is the same one that State Farm used to try to sell their mutual funds.

Get educated on IA's you say!! This particular one was tied to the s&p, had a cap on the upside, yet none on the downside. Based on that, when the s&p returned 11.7%, the client made 1.4%... what is there to be educated on? Annuities are not hard products to understand. I know they are not actually tied to the s&p, but somehow it reflects it. Too many smoke and mirrors for me to get involved in. Please send me copies to prove me wrong... [email protected]

Well that's proof they are no good. Because you saw one with a small return. Tell us, what do you think that particular IA did when the S&P was down 20%?

As someone has already pointed out, you shouldn't compare an IA to the S&P 500. they are different animals.

Personally, I'm an equity guy. I think over the long haul the equities market is the place to invest. But that doesn't mean IA's don't have a place in some portfolios. You owe it to yourself to get educated on IA's if you are going to be offering advice for or against the product.

 

[Norwayguy]

Are not IA tied to the S&P Index? Maybe they added the another one.

Your argument about the s&p down 20% is the same one that State Farm used to try to sell their mutual funds.

Get educated on IA's you say!! This particular one was tied to the s&p, had a cap on the upside, yet none on the downside. Based on that, when the s&p returned 11.7%, the client made 1.4%... what is there to be educated on? Annuities are not hard products to understand. I know they are not actually tied to the s&p, but somehow it reflects it. Too many smoke and mirrors for me to get involved in. Please send me copies to prove me wrong... [email protected]

What your client took was not an annual pt2pt or monthly averaging...So the fact that the S&P was up 11 percent for the year was meaning less...Your client took and option that credits interest annually but calculates it monthly...And as you pointed out it has an upside cap montly but no monthly downside protection...The downside protection remains but it is annually at 0.... Now I have yet to see a FIA that only offer a Monthly Pt2pt crediting option and nothing else...Your client would have been greatly benefited by your helping him change the allocation to one of the other crediting options or a combination of those options.

 

[sman]

Are not IA tied to the S&P Index? Maybe they added the another one.

Your argument about the s&p down 20% is the same one that State Farm used to try to sell their mutual funds.

Get educated on IA's you say!! This particular one was tied to the s&p, had a cap on the upside, yet none on the downside. Based on that, when the s&p returned 11.7%, the client made 1.4%... what is there to be educated on? Annuities are not hard products to understand. I know they are not actually tied to the s&p, but somehow it reflects it. Too many smoke and mirrors for me to get involved in. Please send me copies to prove me wrong... [email protected]

Looks like you have it all figured out Kevin. You pick ONE IA from ONE year and that proves they aren't worth it. That's like picking one mutual fund and basing the entire industry on that one fund.

Why not visit index annuity jack marrion fia and read up on IA's? And here's a link to a study that was done:

http://fic.wharton.upenn.edu/fic/Policy page/RealWorldReturns.pdf

If this info can't help you, nothing can.

 

[0b1kanobee]

Too many smoke and mirrors for me to get involved in.

I agree with the other posts above me and as for you not wanting to get involved in them, well then you shouldn't. Find someone in your area you can refer it out to or work with should you change your mind. I would find a seasoned 403b agent in your area which would be fairly easy to do.

 

[nathan.lee]

Are not IA tied to the S&P Index? Maybe they added the another one.

Your argument about the s&p down 20% is the same one that State Farm used to try to sell their mutual funds.

Get educated on IA's you say!! This particular one was tied to the s&p, had a cap on the upside, yet none on the downside. Based on that, when the s&p returned 11.7%, the client made 1.4%... what is there to be educated on? Annuities are not hard products to understand. I know they are not actually tied to the s&p, but somehow it reflects it. Too many smoke and mirrors for me to get involved in. Please send me copies to prove me wrong... [email protected]

Ah....the good ole "smoke and mirrors" comment. I agree that annuities are not hard products to understand so why follow up with the "smoke and mirrors" comment?

Here is a quick lesson to remember about FIA's and their crediting methods. The 4 most common crediting methods used by FIA's are the fixed account, annual point to point, monthly average, and monthly point to point. With the exception of the fixed account, the others can be indexed against the S&P 500, the DIJA, the FTSE, or some other index depending on the product. Their performance is also limited by caps, spreads, participation rates or some combination thereof.

Let's look at a currently available FIA as an example of how each method works and when it might be appropriate to use it.

Fixed account: 2.50% (Rate guaranteed for 1 year)

1 Year S&P 500 Annual Point to Point with a Cap: 4.75%
Assuming a contract date of Feb 13th and a closing S&P 500 value of 1352 this will be the initial value for our index measurement. Let's assume the closing value of the S&P 500 is 1500 on the anniversary of this contract. 1352-1500 = 148. 148 represent a 10.9% increase in the S&P 500. In this scenario the account would be credited 4.75% based on the cap. This interest credit is locked in and the initial value resets. (annual reset) If there had been a decrease in the S&P 500 between the initial value and the anniversary value then the account would have received a 0%. Obviously the simplest of the index crediting methods. According to Jack Marrion's research this method represents the most consistent returns though time.

1 Year S&P 500 Monthly Average with a Cap: 5.00%
Assuming a contract date of Feb 13th this crediting method also records the "month-iversary" S&P 500 values. (Mar. 13th, April 13th, May 13th, etc) On the anniversary date the 12 data points will be averaged and the initial value will be subtracted to determine a gain or loss for the index. (Feb 13th = 1352, Mar 13th = 1368, April 13th = 1347, etc) Assume those 12 data points equal 17357. 17357/12 = 1446.41. 1446.41-1352 = 94.41. 94.41 represents a 6.98% increase in the S&P 500 index and the account would be credited 5% based on the cap. If there had been a decrease between the initial value and the average value then the account would have been credited 0%. A little more complex but still fairy simple.

1 Year S&P 500 Monthly Point to Point with a Cap: 2.50%
Once again, let's assume a contract date of Feb 13th. and an S&P 500 closing value of 1352. Like the monthly averaging method, monthly point to point also looks at the S&P 500 value on the "month-iversary" dates. However, as discovered by KJ's client, there is no downside cap while there is a monthly upside cap. So, if the S&P 500 drops 10% between Feb 13th and Mar. 13th then the account will need 4 months of gains at or above the 2.50% cap to recover the 10% loss. While this method offers the greatest potential for gain (2.50% X 12 = 30%) it also represents a crediting method that is highly susceptible to market volatility.

Ok, so that was more than a quick lesson. At the end of the day, and FIA is not priced to compete with equity market returns. An FIA is priced to provide returns that are 2-3% greater than traditional fixed annuities while providing the same downside protection.

 

[ktjohnson]

As the market stands right now, I normally do a 70/30 allocation the first year and then we review the performance on our annual review to determine if we need to adjust the allocations.

That's 70% monthly average (Blended Index) and 30% Annual Point 2 Point, which is based on the S&P 500. As a 7 to 10 year strategy it will out perform most if not all fixed products out there.

With this particular carrier, the 5yr average return has been over 4% and the 10 yr average has been just over 6%. You couldn't ask for much more than to have that type of return with no risk. That blows away any CD or Fixed annuity, Money Market, Savings Account out there.

 

[bluemarlin08]

An FIA is priced to provide returns that are 2-3% greater than traditional fixed annuities

So, since you can get a fixed annuity with Midland for 10 years with a guarantee of 3.3%, you would expect an index product to give a return of 5.3 to 6.3 return? Only way it seems that would be possible is with higher caps than currently offered.

 

[nathan.lee]

So, since you can get a fixed annuity with Midland for 10 years with a guarantee of 3.3%, you would expect an index product to give a return of 5.3 to 6.3 return? Only way it seems that would be possible is with higher caps than currently offered.

I was referring to straight fixed annuities vs. fixed indexed annuities. The Midland product you mentioned is a MYGA and therefore a slightly different beast. But you are still correct that its guaranteed return is higher than many of the caps on FIAs.

Let me be more specific.

In general, FIAs are priced to POTENTIALLY return 2-3% more than their traditional fixed counterparts. In this interest rate environment it has been very difficult for carriers to provide caps that are high enough to do that.

 

[bluemarlin08]

Plus, one has the potential of caps renewing lower as well. I can't see FIA having the appeal compared to the referenced Midland annuity.

 

[scagnt83]

Plus, one has the potential of caps renewing lower as well. I can't see FIA having the appeal compared to the referenced Midland annuity.

GA has a 4% Yp2p on their 6 year product. It has a 3.5% bailout (if caps are reduced under 3.5% they waive surrender charges).

I would recommend this to most people over the MN 3.3% fixed, especially considering the MN is locking up your $ for twice as many years!

For a 10ish year product why not go with BAA/BPA and have a 50ish/50ish fixed/uncapped index product...

You arent taking the time frame into consideration. Plus, you are cherry picking the fixed product to compare, but using generalities about the IA....

If I cherry pick the IA (and use a 10 year product), I could use MN's 6.7% Yp2p (Euro stoxx)/ 5.7% Yp2p (S&P 500).
(this supports Nathans statements)

For a 10 year option give me a 5.7%/6.7% cap over a fixed 3.3%. JMO