An Inconvient Questions: FIAs Too Complex or Too Much Competition?
The media and those in the securities industry - particularly those that call themselves regulating authorities - continue to spread disinformation about fixed indexed annuities. The unabashed use of outdated and misinformed material to scare individuals away from an insurance product that protects and preserves assets is irresponsible and begs the question - what is their self-interest?
The security industry’s responsibility should be to help individuals understand their financial and retirement planning options and if one of those is preservation, then the fixed annuity is one of the best solutions. Fixed indexed annuities represent just 1/10 of the total annuity marketplace and about 1/100th of the mutual fund market and it is curious that an industry whose main regulator’s mission is “dedicated to investor protection and market integrity” would forward inaccurate claims about a product that has saved millions of middle and low income Americans from financial loss. NAFA does not presume to understand the political or financial motivations of those in the security industry but as the only association dedicated exclusively to fixed annuities we are compelled to correct the record.
The common claim by state and federal regulators as well as FINRA is that the fixed indexed annuity is too complex. However, NAFA encourages these individuals to consult a typical owner of an indexed annuity. NAFA recently visited its local coffee shop and provided some information along with a calculator to a 76-year old enjoying her coffee. We explained the she would participate in some of the gains of S&P increases up to a maximum of 6.75% (using an actual product’s current crediting method). We asked her to calculate her “account values.” She provided the following:
We explained that if the S&P value was ever negative, she would simply carry over her current account value for one year, adding nothing to her account value and taking nothing from her account value in that year. We asked if the S&P value on 10/28/2008 was 1400. What would her account value be on 10/29/2008 and she answered “that’s easy, $12,165.”
We also told her that the minimum guarantee was 3% on 90% of her premium (using your own example) and asked her for the numbers. She answered with, $ 9,270.00 in year one, $9,548.10 in year two and $9,834.54 in year three.
Next we explained how a minimum guarantee really worked which many in the securities industry failed to do. We told her that her actual account value would be the greater of her current value or the minimum and she understood that her account value in November of 2007 would be the $12,165.
NAFA used this specific product as an example because it was among the top five purchased in 2007*. Individuals who chose this product accepted the 10-year surrender period and the commitment that they would pay a surrender charge starting in the middle teens and ending under 5% over the 10-year. However, they could take up to 10% annually without penalty. And, they also understood that they would receive the full account value if they needed it for home health care, nursing home expenses or if they were diagnosed with a terminal illness. Of course, if they died at any time during the 10-year period their loved ones or beneficiary would receive the full account value without any surrender penalty. Other features available in products today are guaranteed income payouts, fixed interest accounts for all or some of their account value and tax-deferral of all interest accumulation. In addition, the account value is not included in current income when determining social security benefits. These are all very good reasons for purchasing the fixed annuity. Contrary to the what is written, the products most sold and purchases today average surrender periods that are under 10 years and heaped first-year commissions that range from 6-8%. These heaped commissions are in fact much less than financial advisors earn from managements fees regardless of whether their client’s portfolio has increases or losses.
FINRA, regulators, financial advisors, and the media have inundated the airwaves with discussion on the complexity or limitations of insurance products but have remained silent on the complexity and limitations of mutual funds with A shares, the real impact of management fees to individual portfolios or reading a prospectus, NAFA believes that individuals are not as uneducated or confused as many assume. By taking the lead and gaining a better understanding of fixed annuities, the securities industry could actually help individuals seeking to preserve retirement savings or guarantee income. NAFA stands ready and willing to provide more information so that the consumer will clearly and accurately understand the benefits and limitations of fixed annuities. Please call us at 888-884-NAFA for more information.
*Source: Beacon Research