Comments on: Don’t buy index annuities

By: Acceleratekc

Acceleratekc — Wed, 16 Mar 2011 16:09:50 +0000

First, let me say that Index Annuities are excellent products. I too am angered by how these products are sold to individuals without first educating them on what the products can and can’t do and without providing proper disclosures. It makes my job more difficult when I have to overcome what my so called ‘peers’ are doing. It is doubly difficult when flawed and biased articles as these abound.

When used appropriately, index annuities offer a viable alternative in the marketplace and my clients have been satisfied with the safety and results. I think it is a slanted and uneducated view to condemn the entire industry based on a few crooks. Whether it is the SEC or insurance regulators, we’ve seen failures and ‘Bernies’ on both sides.

These are not securities products as anyone who understands the mechanics of an annuity would quickly see. This is clearly not the case of this contributor. The SEC failed to regulate these products as securities as it desired due to the fact that they are not securities. 151-A was overturned for a reason and I recommend thorough understanding before condemnation or in the case of my so called ‘peers’ misselling.

By: hsvkitty

hsvkitty — Wed, 19 Jan 2011 15:53:39 +0000

“What Gibbs doesn’t do is raise any hope that the Consumer Financial Protection Bureau or anybody else will start regulating and cracking down on the index annuity racket. Insurance regulators are reasonably good at regulating the sale of genuine insurance products. But index annuities are not insurance products, they’re financial investments. And they should be regulated as such, by a federal regulator.”

Great article felix! The Consumer Financial Protection Bureau SHOULD be able to umbrella anything that is NOT covered by the SEC that falls under its heading… Consumer Financial Protection …

By: TFF

TFF — Wed, 19 Jan 2011 02:53:58 +0000

Thanks, Felix, for the lengthy comments and insight!

I’m still struggling with the rationale for a payout annuity of any sort, though I guess it depends on your personal situation. A $1M joint life annuity at the age of 60 promises a little over $50k annually, just a 5% draw rate. Index that for inflation and another third is lopped off.

How is this superior to a 3.5% dividend portfolio built from high-quality stocks? I guess the annuity is a LITTLE more certain to actually produce that income, but if we hit an economic crash severe enough to cause JNJ, KO, and PG to slash their dividends, I can’t see many insurance companies surviving. And when you annuitize, you lose all control over the principal — especially the right to change plans if your circumstances (or health) changes.

I could see an annuity making sense for a single individual with good health and “just enough” to make ends meet. But for a couple retiring in their early 60s, there is a good chance that SOMEBODY will need the income for a very long time. And the principal amortization under those assumptions is sufficiently low that it gets entirely eaten up by the fees. Which leaves just investment returns to support the annuity payments. Investment returns from a highly conservative portfolio that can be easily duplicated WITHOUT the high fees.

Am I missing something or are annuities the biggest sell job around?

By: CavelCap

CavelCap — Tue, 18 Jan 2011 23:34:09 +0000

@dwj No, indexed annuities are not the same as variable annuities. VAs are composed of “subaccounts” which are generally based on actively managed mutual funds. So your account value can go up or down, with no floor or ceiling. An indexed annuity’s growth is based on the performance of an index, but with a floor and a ceiling, usually 0 or 1% and somewhere between 9 and 15%. Said floor and ceiling being before fees, of course.

By: dWj

dWj — Tue, 18 Jan 2011 21:18:06 +0000

The traditional advantage of a variable annuity — is this more or less that? — over a fixed annuity is inflation protection. (Though it’s not particularly well-suited to it, it’s better suited than a fixed annuity.) There are inflation-adjusted fixed annuities, but they’re fairly uncommon. They should be more common — perhaps a more robust TIPS market in which to hedge risks would help promote that.