How an Equity Indexed Annuity Works?

[KJ in Miami]

I have my own opinions about them. Every advisor does not have to agree on what they use with their clients!! Thanks for your understanding of that point.

I prefer the VA as the income rider gives them guarantees. I believe that they are more vetted then the IA's. As I have taken some graduate level mathematical & statistics courses - I understand the mathematical trickery to a certain extent. After studying these products, I feel the insurance company pays the brokers to put their clients into these products. Most agents do not look past that. If you understand the product and feel it is the best thing for you client - you have NO compliance department to supervise that decision - I just hope you have read the sample contract.

What kind of scenario would you say calls for an IA for a client?

ProducersWeb - Insurance company sued in class action lawsuit over equity indexed universal life

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.

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Please explain to me the other option?

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?

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Dude, have you ever read a "sample contract?"

I agree that insurance companies are not non-profit entities... but that is about all I agree with. According to you, the IA insurance company takes the "risk." If their actuaries did not say they were in a good position, they would not be in the market.

An "FIA" is very similar to a VA in my opinion. Say what you want but most clients are sold on the fact that they can be "tied" to the market with NO downside risk. Where do you think I get my comparison from homie!! Fees in a VA should not be reason someone gets into a IA for they have caps & spreads.

Markets typically follow inflation, but a product that guarantees only that you get your money back cannot offer that to a client! Unless you can show me facts of "actual" bonafide IA contracts you have sold (names blacked out), I cannot see that you even have an argument. Well, a theoretic argument possibly.

Everyone is prone to sue if they feel you have misled them, not just those "prone to make legal suits." That is a stupid comment homie!!

What is your take in the game? Are you an Agent, FMO, or what? Do you have a 6? Who do you sell most of the IA's with currently? Do you understand mathematics & probabilities (I would not believe it based on some of your statements)?

Do you believe that the cards are not stacked in the houses favor when you go to a casino? And, do you believe that these gambling establishments or IA companies are losing money, that is why they pay out such high commissions? Please, explain how these things happen in your world?

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.

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I appreciate the discussion and accept the apology. I really was not looking for one and can take debate that is civil, but thank you for giving me one. It is good to hear that you can make up your own mind and are not a "kool-aid" drinker, as that is what I am doing here. I am not scared to admit when I am wrong. I do not believe I am in this discussion and I lay out my points to validate it. Some people do not understand the argument as they cannot undertand the mathematical models used to calculate the caps, spreads, ect. I wonder if these are the same people that believed Obama when he said that Obamacare would decrease healthcare costs?

When I say "smoke & mirrors," here is what I am talking about. Insurance companies - as someone indicated already - are not a non-profit organization. They do make money for the insurance company otherwise they would not sell them paying a HIGH commission. They are sold mostly as an alternative to a some kind of invest, whether that be MF or VA. Principal guarantee is a main selling point - but once you factor in inflation, that is a real return of -3% to -4%. Under the current administration, it may be way higher soon. To me, that is not educating the client to this fact. For that, they would most likely be better served in a CD or money market account. If you say the market is not going to be down that long, I would ask you why not then put them into a VA? The IA company is make a lot of money, have you ever asked yourself how? I would say by smoke and mirrors!

I know enough about IA's and mathematical concepts to understand the way that the insurance company makes it money and pays its broker well. I am not jealous, just not sold on the product. I know that I am not the only one, know of many CPF's who gave me greater explanations of why these products are not good vehicles for investment, and therefore stay away from these products.

Lastly, please give me a scenario that you believe would be a good fit to recommend an IA too? Do you have a 6? Thanks again for the discussion.

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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!!

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.[/quote]
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I stand corrected on that commission... but an Agent that I was talking to a couple weeks put someone in a IA because of the HIGH commission. Listen, I will admit when wrong but you haven't proven a point. Show me the sample contract - otherwise it sounds like kool-aid to me!! I don't use them.

How many sample contracts have you read?

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?

 

[KJ in Miami]

Can anyone please send me a "sample" IA contract? I am sure most companies have somewhat different ones - but let's take one apart or we are talking BS. Reading a pro-IA post/article by someone apparently "pro-IA" is like asking Obama if Republican are the cause of all of his failures. Stop referring me to an article and send me a "sample" contract!!!! Let's talk real stuff - not hypotheticals not vetted by compliance.

If an IA insurance company that makes $200 million and pays out in lawsuits $50 million, they are still winning!!!

Can we break apart a "sample" contract or are we going to talk hypotheticals???


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In what case would you recommend a IA - in what situation?

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.

 

[iceco1d]

KJ,

Without using Google, and without copying someone else's reply, can YOU explain to ME how you believe a FIA works? In other words, you give $100K to an insurance company to purchase a FIA; what might the client contract look like, and what exactly does the insurer DO with the money once they have it?

Secondly, you keep talking about insurance companies making huge dollars on these contracts. You do realize, they make a lot more on variable annuities, than indexed, right? If you don't believe me, call your local variable and fixed wholesalers. Ask them who gets a bigger marketing budget (it's the variable guys). Ask them flat out what the company makes more money on (again, they will tell you variable). Ask Pacific Life, Allianz, Lincoln, or any other company that manufactures both products.

Finally, you want a a scenario where a FIA fits, no problem.

Advisor: Well Mr. Smith, what can I do for you today?

Mr. Smith: I'm considering switching advisors.

Advisor: Why is that?

Mr. Smith: Because I'm sick of losing money. I've been losing money for 10 years and my broker never calls me.

Advisor: What are you invested in?

Mr. Smith: Mutual funds.

Advisor: Are you comfortable with the market?

Mr. Smith: No.

Advisor: Would you be comfortable with the market if we could guarantee you that if the next 10 years stink as bad as the last 10, you could get all of your money back? (GMAB).

Mr. Smith: You mean, 10 years and I make nothing?

Advisor: That's correct. But you'll get your money back as a worst case scenario. If the market goes up, you could make a lot of money.

Mr. Smith: No. I already didn't make anything the last 10 years, I can't make nothing for the next 10 years. I need to make at least something on my money.

Advisor: Alright. Would you be comfortable with an income guarantee (explain income riders with guaranteed ratchets on a VA).

Mr. Smith: Can I take that money out in a lump sum if i want?

Advisor: Only the contract value, not the income base.

Mr. Smith: So I might lose money?

Advisor: Yes, if you want a lump sum, you could lose money.

Mr. Smith: No, that's not OK.

Advisor: Well Mr. Smith, a 5 year CD right now is paying 1.7%. I have a 5 year MYGA fixed annuity, paying 2.0%. I can also show you a FIA, while you may get only 1% interest, if the stock market does well, you could earn 4%. Would you like to know more about that option?

Mr. Smith: I don't want to be in the market.

Advisor: You wouldn't be.

Mr. Smith: Can I lose money?

Advisor: No. Your only risk is that you only get 1% on your money if the market does poorly. If the market does well, you could get 4% or more in interest.

Mr. Smith: I'd like to hear more about that.

There you go. Plenty of people are like this.

Now, I want to hear you explain how FIAs work. Put that "graduate level stats" course to work, and show me.

 

[KJ in Miami]

Good one!! But what is the purpose of the money?

If he is going to leave it to people as a legacy - I am not sure what kind of guarantees an IA has in it?

For income, then a VA would fit as educating him to why would make sense!n Of course more info would be needed (disclaimer).

PLEASE PLEASE PLEASE send me a "sample" contract so that I can look at one and admit you are right or not!! Otherwise, it is all just conjecture.

How do I think an IA works you asked. With an upside cap, even if the market index the product "mirrors" goes up 30%, they are fixed at the most. No downside caps, the cards are therefore stacked against the insured. The probability that the market is always going to be up in one year, or that the insured can make a decent return here can almost mathematically determined. As with every model, there is error and it will be wrong a % of the time. But that is a risk the insurer is willing to take. Mathematical trickery, mathematical soothsaying, probability MAGIC, or statistical divination you might call it. Whatever name, show me a SAMPLE CONTRACT to disprove/correct me or bud, it is just conjecture!! I could be wrong -- I thought forums were to gain knowledge and not just recruit or sell advertising or you telemarketing or whatever!!

A 4% return is not bad for an IA. My CFP friend agreed the return over time historically is 4%. However, what caviots are in the contract to benefit the insurance company??? SHOW ME the CONTRACT PLEASE. Let's see what it says. He, having read one, said it was NOT a good contract. I know him and he does not have alternative motives as some might have (not saying you).

Contract please???????????????????????????????

 

[pcbinsurance]

WOW....it's Sunday....take a rest.

 

[sman]

Good Lord dude, you have a hard on for a "sample contract". Call any insurance company you are appointed with who sells IA's and ask for one. It's really that simple. You keep talking about your CFP friend who has read one, get his copy. For what it's worth, being a CFP does not make one an expert on IA's.

You mentioned legacy and IA's. Many have rider's that can be attached (just as with VA's). The BAA from Aviva had a 5% family endowment rider (it's now 4%). Pretty nice feature that allows for the client to have a lifetime of income AND leave the majority of the investment to the beneficiary.

We get it Kevin. You think you're smarter than everyone else when it comes to IA's. If your such a fan of investing in the markets, why do you only mention VA's? In my opinion, the only use for a VA is for risk management purposes. If someone wants to invest in the market aren't there much more efficient ways than with a VA.
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Can't edit from my phone. Your should have been you're in the last paragraph.

 

[KJ in Miami]

Thanks for the info... I will let it go. This guy keeps arguing his points and arguing points with a ghost contract. That is what Obama does, he says something and I just want to see the company he is using. Have a good day!!

Good Lord dude, you have a hard on for a "sample contract". Call any insurance company you are appointed with who sells IA's and ask for one. It's really that simple. You keep talking about your CFP friend who has read one, get his copy. For what it's worth, being a CFP does not make one an expert on IA's.

You mentioned legacy and IA's. Many have rider's that can be attached (just as with VA's). The BAA from Aviva had a 5% family endowment rider (it's now 4%). Pretty nice feature that allows for the client to have a lifetime of income AND leave the majority of the investment to the beneficiary.

We get it Kevin. You think you're smarter than everyone else when it comes to IA's. If your such a fan of investing in the markets, why do you only mention VA's? In my opinion, the only use for a VA is for risk management purposes. If someone wants to invest in the market aren't there much more efficient ways than with a VA.
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Can't edit from my phone. Your should have been you're in the last paragraph.

 

[bmono24]

Great product. Great explanation. It is hard to explain to customers though. Takes a few visits.

 

[Norwayguy]

Great product. Great explanation. It is hard to explain to customers though. Takes a few visits.

A few visits to explain how a fixed index annuity works. It is a fixed product like any other fixed annuity with certain guarantees the difference is instead of the insurance company setting the interest rate the interest that is credited is based on the positive performance of a certain market index.

 

[Norwayguy]

You have explained equity indexed annuities really well. A fixed indexed annuity is for people who want to be more aggressive in their investment while still securing a floor for minimum growth. Though it is still connected to the market, there is probably less risk in a fixed indexed annuity than in a variable annuity.

Probably less risk than a variable annuity?

There is no probably about it one product absolutely guarantees principal and growth once credited and one does not.