Indexed Annuities Offer Large Profits and Commissions for Insurance Companies, but Questions Remain as to Whether these Products are Good for Clients
What do I Need to Know?
Whether the individual investor is considering purchasing an Equity-Indexed Annuity, or already has, it is vital to be aware of the following complexities make the product as enigmatic as the now famous Collateralized Debt Obligation which is at least partially responsible for the financial meltdown of 2009-2011:
- Equity-Indexed Annuities are products, not investments. An Equity-Indexed Annuity is a contract that is actually purchased from an insurance company through a third party, usually a broker or registered financial advisor. The broker or advisor receives a commission, and the insurance company immediately goes to work investing the contract price in order to make as much money as possible during the time that the investor pays over the annuity amount. The investor hopes to receive the desired income stream later in life.
- Registered Financial Advisors are selling Equity-Indexed Annuities. This does not seem like a big issue at first glance, but, registered financial advisors owe a very high, fiduciary, duty to clients. Insurance brokers only owe clients the duty to suggest “suitable” products--although the Department of Labor has made plans to change this. As a reference, lawyers and executors of estates also owe fiduciary duties to those they protect. The major problem becomes when a registered financial advisor, owing a fiduciary duty to the client sells an Equity-Indexed Annuity, which, while suitable, is not actually the best financial decision for the client. Significant legal liability may await the advisor, while financial disarray may await the client. Generally speaking, if a financial professional has designed a “financial plan” for the client, a fiduciary relationship may exist.
- Dividends are not usually afforded to the client. While a particular Equity-Indexed Annuity may offer baseline interest rate, the individual investor that purchases an Equity-Indexed Annuity will likely miss out on reaping any dividends and any accompanying reinvestment.
- The Index used to calculate your Return may not be the S&P. While Equity-Indexed Annuities are always tied to a particular index, the index that may vary. The index used to correlate returns in an Equity-Indexed Annuity is vitally important. Certain indices will always outperform others during certain periods of time. Further, some Equity-Indexed Annuity contracts allow the insurance company to determine the base index that is to be used during various periods of time. This determination may not always be in the best interest of the individual investor.
- The Guarantee is only as good as the company promising to pay. All investors alive today have experienced too big to fail. For example, on March 11, 2008, AIG introduced its “Global Bonus Index fund” to great fanfare. An Equity-Indexed Annuity is an insurance contract and nothing more.
- Fees abound. An investor will likely be subject to early surrender fees, death benefit surrenders if moving from another annuity to an Equity-Indexed Annuity, and the most import fee of all, the fee that applies if Equity-Indexed Annuity holders do not choose to annuitize. The guaranteed minimum income benefit will likely only apply if you annuitize.
So Who Is Looking Out for Me?
Equity-Indexed Annuities are tied to equity markets. This opens the door to both state and federal securities regulators to become involved in the regulation of Equity-Indexed Annuities.
The Illinois Department of Securities has already taken action in certain Equity-Indexed Annuity cases. While all insurance products are regulated at the state level, securities regulations are often be more stringent than insurance regulations. This added level of governmental scrutiny does provide some protection to individual investors, but when purchasing a complex product such as an Equity-Indexed Annuity, there is no substitute for research and due diligence on the part of the individual investor. The Financial Industry Regulatory Authority, known as FINRA, also has literature available outlining in great detail the complexities of Equity-Indexed Annuities.
What Should I Do?
Educate yourself. There is a tremendous amount of information on Equity-Indexed Annuities available on the internet. Ask questions, constantly, to you insurance broker or advisor. This is the only way to fully understand any insurance product; not to mention one as complex as Equity-Indexed Annuities. Questions should include:
- Are you a fiduciary?
- What is your commission?
- What index is the Equity-Indexed Annuity tied to?
- Do I need to annuitize to receive my full benefit?
- What early withdrawal fees apply?
- What other penalties apply?
- What is the AM Best Rating of the company with which my annuity was purchased from?
- And most importantly, could the same projected income result be reproduced in a more cost effective, lower commission, format?
If you have any questions about Indexed Annuities or feel as though you may not have been told the full story, feel free to contact us.