How an Equity Indexed Annuity Works?

[Norwayguy]

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.

You can always turn to a product that uses a Participation Rate instead of a cap. Yes you lose out on small year returns but if your product has a 60 percent participation rate and the market does 6 percent or more your beating 4 percent caps...If you have a 40 percent participation rate your beating 4 percent caps at a 10 percent or more....I show my clients a piece on the S&P500 that shows on average you need to capture 30 percent of the market growth to get the same long term return if you can eliminate 100 percent of the losess.

 

[iceco1d]

Norway,

What are your favorite participation rate contracts?

 

[KJ in Miami]

Is it true that the average 10 year return on IA is 4%? And, the income rider cost 1% making the return actually 3%?

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.

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Yeah, your the only one that knows the truth buddy! I have spoken with many folks about it. In fact, had a good conversation with a CFP about them today. I'll check out your link, but if it is written by an non-objective source, I guess I will just chalk it up as "smoke & mirrors." ***Edit: your paper does not take into account the monthly caps & so forth, plus written by someone who is involved with IA products and therefore not credible**

Cause you seem to gang up does not prove your point!! The fact is that these products offer a great commissions. They cannot be called investments but are often sold as such. I wish I could get Scott on here but I can't. He has actually read a sample contract and is full of knowledge on these products.

I guess they might be able to work for some folks (if they want to lose money through inflation), but with the lack of regulation and other seemingly "smoke & mirrors" that these products offer, I would feel more comfortable with a VA. Nobody has proven anything wrong, I left my email address to send me proof, nothing. So if you want to gang up because that is the way you so how "smart" you are, then have fun. But it still does not negate the point!!

Funny story, I was talking to a guy from W Palm Beach who invested in an IA, told me that he made no money and thought that it was the worse investment. I like you guys on here you seem to think that you are the only ones with real life examples to share. I wonder what might be your motive? Share with me ONE guarantee in the contract that is in the benefit of the insured???

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.

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Question: Do you not think these caps, spreads, ect. are smoke & mirrors? Do you just brush of clients who ask you the same thing? What is the cap on the downside, meaning if the market takes a dive, is the insured protected?

What you do not seem to understand is mathematically these products are designed so that the house wins. Of course, every so often the insured will win. If IA companies make $500 million dollars and get sued for $20 million, they still make out. If you have no real grasp of mathematics, then I could understand why you would not understand why these caps are there. Understand the concept!!

You dismiss my comment with "ah... the good ole 'smoke and mirrors' comment." Apparently you have heard it before and yet it does not register. Instead of attacking the messenger, and giving me your FMO's talking points, show me how someone could make money in this type of product (real life examples with tangible proof would be the only ones I would accept). If one month the s&p is down 11%, up 13% the next month with a 4.75% cap, then the client is still down -6.25%. Mathematically, not in favor of the client!! And clients cannot sue them because "technically" they did not break the law... wow!!

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.

 

[Norwayguy]

You dismiss my comment with "ah... the good ole 'smoke and mirrors' comment." Apparently you have heard it before and yet it does not register. Instead of attacking the messenger, and giving me your FMO's talking points, show me how someone could make money in this type of product (real life examples with tangible proof would be the only ones I would accept). If one month the s&p is down 11%, up 13% the next month with a 4.75% cap, then the client is still down -6.25%. Mathematically, not in favor of the client!! And clients cannot sue them because "technically" they did not break the law... wow!!

Your example is 100 percent accurate when speaking of a Monthly Pt2Pt crediting Method. This is only 1 method of crediting interest. You are totally ignoring the Annual Pt2pt and Monthly Averaging crediting methods.

How about my question...Why are you incapable of looking beyond the monthly pt2pt crediting method?

 

[sman]

Yeah, your the only one that knows the truth buddy! I have spoken with many folks about it. In fact, had a good conversation with a CFP about them today. I'll check out your link, but if it is written by an non-objective source, I guess I will just chalk it up as "smoke & mirrors." ***Edit: your paper does not take into account the monthly caps & so forth, plus written by someone who is involved with IA products and therefore not credible**

Cause you seem to gang up does not prove your point!! The fact is that these products offer a great commissions. They cannot be called investments but are often sold as such. I wish I could get Scott on here but I can't. He has actually read a sample contract and is full of knowledge on these products.

I guess they might be able to work for some folks (if they want to lose money through inflation), but with the lack of regulation and other seemingly "smoke & mirrors" that these products offer, I would feel more comfortable with a VA. Nobody has proven anything wrong, I left my email address to send me proof, nothing. So if you want to gang up because that is the way you so how "smart" you are, then have fun. But it still does not negate the point!!

Funny story, I was talking to a guy from W Palm Beach who invested in an IA, told me that he made no money and thought that it was the worse investment. I like you guys on here you seem to think that you are the only ones with real life examples to share. I wonder what might be your motive? Share with me ONE guarantee in the contract that is in the benefit of the insured???


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Question: Do you not think these caps, spreads, ect. are smoke & mirrors? Do you just brush of clients who ask you the same thing? What is the cap on the downside, meaning if the market takes a dive, is the insured protected?

What you do not seem to understand is mathematically these products are designed so that the house wins. Of course, every so often the insured will win. If IA companies make $500 million dollars and get sued for $20 million, they still make out. If you have no real grasp of mathematics, then I could understand why you would not understand why these caps are there. Understand the concept!!

You dismiss my comment with "ah... the good ole 'smoke and mirrors' comment." Apparently you have heard it before and yet it does not register. Instead of attacking the messenger, and giving me your FMO's talking points, show me how someone could make money in this type of product (real life examples with tangible proof would be the only ones I would accept). If one month the s&p is down 11%, up 13% the next month with a 4.75% cap, then the client is still down -6.25%. Mathematically, not in favor of the client!! And clients cannot sue them because "technically" they did not break the law... wow!!

Kevin, you choose to believe what you want to believe. It's not our job to convince you otherwise. You dismiss all evidence.

And the section I highlighted in bold from your post just shows your lack of understanding. The worst return a person gets in an IA is zero. Not negative.

There is all kinds of information on the website I provided. Especially in the library. For some reason you dismiss it because the guy is "involved" in the IA market. He doesn't sell IA's. Who would you rather have providing information about the product, someone who doesn't understand them?

I rarely sell an IA. I am an equities guy. But I understand the place and value of an IA. There was a great one available back in the mid-2000's. It was offered by ING. It was called the ING Secure Index Seven. Had a cap around 7.25% with a minimum return guarantee of 3% on 100% of the premium. That meant on a $100k investment, the worst that could happen is they would have $122,987 at the end of 7 years.

Let's face it, you don't understand IA's. And that's ok. I would recommend you start learning of ways to limit client losses if you are going to be advising them on their investments. Because studies show that more and more people are more concerned about the return OF their money than the return ON their money. The years 2000-2002 and 2008 have changed a generation of investors.

You talked about feeling more comfortable with VA's. Why is that? What protections are there for the client in a VA? Can a VA prevent them from losing money? How are the fees on a VA compared to an IA? Especially once you add the income rider?

Don't get me wrong, I use VA's as a risk management tool for the person who wants to guarantee an income and still stay in the market. But unlike you, I realize there is also a place for Index Annuities.

 

[njh_lfg]

KJ: every post I read from you makes me cringe and your lack of knowledge of the annuity market is very clear.

"the house wins": not correct its called margin the insurance carrier collects in order to transfer the risk from the client to the carrier. Insurance companies are not non-profit entities.

your "I feel more comfortable with a VA" comment is apples to oranges. FIA is a fixed product with no downside risk (except rider costs) while a VA is subject to market risk and fees that range from 1-4%.

"They can't even sue." Keep in mind if you have clients who are prone to make legal suits then your chances of getting sued in the future are really high. This is why there are a lot of individuals, such as myself and partners, who will not work with attorneys.

Quit making stupid comments and people will not "gang up" on you, homie.

 

[nathan.lee]

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Question: Do you not think these caps, spreads, ect. are smoke & mirrors? Do you just brush of clients who ask you the same thing? What is the cap on the downside, meaning if the market takes a dive, is the insured protected?

What you do not seem to understand is mathematically these products are designed so that the house wins. Of course, every so often the insured will win. If IA companies make $500 million dollars and get sued for $20 million, they still make out. If you have no real grasp of mathematics, then I could understand why you would not understand why these caps are there. Understand the concept!!

You dismiss my comment with "ah... the good ole 'smoke and mirrors' comment." Apparently you have heard it before and yet it does not register. Instead of attacking the messenger, and giving me your FMO's talking points, show me how someone could make money in this type of product (real life examples with tangible proof would be the only ones I would accept). If one month the s&p is down 11%, up 13% the next month with a 4.75% cap, then the client is still down -6.25%. Mathematically, not in favor of the client!! And clients cannot sue them because "technically" they did not break the law... wow!![/quote]

Answer: No...I do not believe that caps, spreads, participation rates, etc. are "smoke and mirrors." The "smoke and mirrors" description is usually applied to bonuses and in some cases the income riders. The cap rates, spreads, etc. are all stated and and as we both agree fairly easy to understand. And as Peter mentioned, the only common crediting method with an unprotected downside is the monthly pt2pt but that does have a floor of 0% with regard to the amount of interest credited at the end of the year. So if the market takes a dive the insured IS protected from loss.

To your second point...I am fully aware why the caps are in place. I have to admit that I am a little confused by this paragraph though. You start with product design and then switch to a company being sued. With regard to the "house wins" comment, should I assume that you mean that the client and/or his beneficiaries will not receive at least the premium paid to the carrier? I'm sure there are products on the market which would do this to a consumer. The main selling points for FIAs in today's market are principal protection and contractually guaranteed income. If you want to compare FIAs to other investment vehicles then we are trying to compare apples to oranges. I don't believe that FIAs are the answer to every question not do I believe they suitable for every client. But for a portion of some client's funds, they can provide solutions to their concerns.

If my apparent dismissal of your "smoke and mirrors" comment offended you then I apologize. You are correct, I have heard the comment many, many times and in my experience often it comes from a someone that misinformed about the mechanics of FIAs or misinformed about the intended use of FIAs. Let's look at a couple of scenarios using your example of an 11% decline in one month and 13% increase in the next month. For this example let's assume a starting S&P value of 1000 and the other 10 months of the year were flat.

Monthly Point to Point with a 4.75 monthly cap.
1000 receives an 11% decline and ends up at 890.
890 benefits from a 13% increase and ends up at 1005.7.
This increase is subject to a 4.75% monthly cap and so the ending "value" would be 932.275.
Since 932.275 is below the initial value of 1000 and we assumed the rest of the year was completely flat the client receives 0% credited to his index account under this crediting method.
While the client did not lose any principal he did not participate in the .57% gain for that year.
Annual Point to Point with a 4.75% annual cap.
1000 receives an 11% decline and ends up at 890.
890 benefits from a 13% increase and ends up at 1005.7.
Assuming the rest of the year is flat and the increase is subject to a 4.75% cap the client would receive a .57% credit to his index account.
In this scenario the client receive exactly the same gain as the S&P 500 index.

To reiterate, I do not believe that FIAs are a fit for every client as each client's financial situation, risk tolerance, liquidity needs, income needs, and time horizon are different. I do believe that for the right client and for the right portion of their funds an FIA can provide valuable guarantees and often more importantly peace of mind.

As far as giving you an FMO's talking points are concerned...well I haven't consumed that much Kool-Aid yet. Although I do make my living as a wholesaler of MYGAs, fixed annuities, SPIAs, FIAs, and a few other financial products, I am far from the brainwashed FMO employee that spouts off what is on a spec sheet or brochure. My personal experience as a former RR and my corporate finance education keep me a little more grounded than that.

 

[iceco1d]

Couple of points here to add...

1. It is obvious that KJ doesn't understand how a FIA works. At least before you make your mind up about an entire product class, why not do some research and see what's really going on? If you still don't like them, don't use them.

2. There are no "smoke and mirrors" intended on the products. Can they be complex? Yes. Can they be simple? Absolutely. You have to realize what is going on in the background to make them work, and you'll see why the different crediting methods work the way they do. It's not different than anything else, there are trade offs. When you get in a car accident, and have to pay your deductible, was your car insurance "smoke and mirrors?" No. It's just a feature built into the product. Sucks for the customer, but you can't have your cake and eat it too.

3. On "juicy FIA commissions" - I'm sure there are are very heavily loaded FIA products out there, but for the most part, the commissions are not that great. Consider these 3 very popular, very mainstream products...

Pacific Life L-Share Variable Annuity: 3.5% up front, 1% trailing payment starting in year 2. Total commissions paid after 10 years: 12.5%

Edward Jones Advisory Solutions Managed Mutual Fund & ETF Account. No up front commissions, but the annual fee to the client is 1.35%. Total fees paid after 10 years: 13.5%

Allianz MasterDex X Indexed Annuity: 2.25% up front, .75% trailing payment starting in year 2. Total commissions paid after 10 years: 9.0%

Now you tell me...what would you rather sell?

 

[VolAgent]

Most people aren't getting scalped that bad by their B/D.

 

[iceco1d]

Please elaborate. I'm talking about trailing payout options on the annuities (i.e. option B on the PacLife product, and option C on Masterdex).