By Alfred Louis Filippini, RFC, Ph.D.
Extracted from Round the Table Magazine
There are three popular myths about equity index-linked annuities (EIAs):
Myth 1: Are they a hybrid?
- EIAs are a hybrid between fixed annuities and variable annuities
- EIAs are too good to be true (so there must be a hidden catch)
- EIAs are not client-friendly
EIAs appear to be hybrids between a traditional fixed annuity and a variable annuity. They are not. Unlike variable annuities, where a client's principal can fluctuate with the marketplace, the principal and accumulated interest in an EIA is guaranteed. EIAs are guaranteed fixed annuities that offer all the benefits and guarantees of traditional fixed annuities with the added bonus of guaranteed inflation-fighting opportunity options. Some of the benefits and guarantees include:
Myth 2: Are they too good to be true?
- Minimum interest rate credited for the life of the annuity contract, usually 3% annually
- Guaranteed settlement options (like in life insurance policies)
- Guaranteed participation option
- Ability to go up, but never down, due to market risk
- Gains can be reset each year
- Loss years are reset at no principal or accumulated interest loss, increasing the potential interest return
- True diversification and flexibility through simultaneous interest strategies
Not many investment opportunities are guaranteed. This is an important point to make to your prospects and clients. EIAs are fully guaranteed, hence their claim to fame as a safe money vehicle. They also provide another guarantee not contained in any other financial vehicle, namely the guarantee of opportunity with a built-in stop loss: opportunity to profit in an up market without market risk of loss of principal.
Myth 3: Are they client-friendly?
EIAs are client friendly because they offer choices. The best EIAs allow the client to move money from one strategy to another. Unlike other fixed annuities, EIAs allow the client to choose between a fixed account and/or others linked to market indices. Most EIAs allow the client to change their investment strategies annually from among a pool of indices, U.S. treasury bonds, stocks and more. They provide the client with the choices and flexibility to jump on the opportunities of changing financial market conditions without traditional market risk.
Multi-bucket EIAs allow clients to select different index crediting methods. Some products have as many as 10 buckets, which can include a fixed account, bond accounts and others linked to popular stock indices.
Choosing a good EIA
How can you make sure the EIA you recommend is a good one? Every EIA is slightly different. Before you present an EIA to a client, carefully study its guarantees. Also, each EIA has a different "index term," which is the ideal number of years to hold that EIA and gain its full benefit with no early withdrawal charges. Because EIAs are designed for long-term money, your clients should understand the importance of holding their EIA to the end of its term. Here are some features and provisions to consider:
Author: Alfred Louis Filippini, RFC, Ph.D., is a 3-year MDRT member from Carpinteria, CA. He has earned two Court of the Table and two Top of the Table qualifications. An authority on tax and estate planning, he was recently inducted into the Society of the Senior Market Professionals National Hall of Fame.
Last Updated: 4/26/2004 11:10:00 AM
- Adequate investment return strategies - a variety of choices and buckets
- Annual reset EIAs - monetary gains are automatically locked in each year
- Guaranteed minimum return
- Moving parts - the true costs associated with EIAs, including the methodology used by insurance companies to maintain profitability and credibility, information about asset fees, caps and/or participation rates.
- Withdrawal privileges - check for penalties
- Alligators - invisible features that will bite you (and the client) when you're not looking, such as two-tiered products and hidden penalties and fees.