Indexed annuities- Clueless reps and consumers

FOR IMMEDIATE RELEASE
San Francisco Bay Area, California, United States of America (Free-Press-Release.com) March 21, 2011 -- For the uninitiated, these are annuities that base their returns on an index in the stock market. Could be the S&P 500, NASDAQ, HANG SENG and a bunch of others. The other part is that such annuities cannot lose no matter what the stock market does- say 2008 where it dropped 57% top to bottom.

For the sake of expediency in this commentary, allow me to state that as soon as readers, consumers, agents et al see the words stock market, they are assuming they can get the returns of the stock market. And since I have been around in this business for a very long time (I am old), I can assure you that is the focus on the sale of such products.

Get the returns of the market without the market risk!!!

Totally wrong!!!!

THESE ARE BOND FUNDS

These annuities started hitting the market in the late 1990s. Great marketing, but after researching many and attending the many company seminars where they danced around the concept in order to hype the agents, I pretty much settled on the fact that in 60%- 80% of the time, they might beat a ‘regular’ bond fund of the same maturity; 10% to 20% of the time they would do no better; and in 5% to 10% of the time, the returns would be less.

Never forget this whenever any of you do an article on these.

Concept

The companies offer consumers a product where about 90% of the investment goes into standard bonds and the like. The other 10% goes into an option of one or more of the indexes. If the indexes go up, the consumer gets a piece of the appreciation of the market. If the market is flat or goes down, the cost of the option is lost but not the bulk of the money. Nor the returns being generated on the bonds. Pretty simple overall. And valid.

Except that there are restrictions in the contracts can drive one to distraction. They also reduce returns. To wit...

CAPS
The market may actually provide a substantial return- assume it is 20% for the past year. And when you look at that you think you are a ‘winner’. Not so fast. The company may have already stated that the greatest amount of gain for the consumer is ‘capped’ at 10%.

Participation rate
Of the gain that is mentioned, it still does not mean you will ‘participate’ in all of the gain. Maybe the contract says 60%. Your returns have dropped even lower. You now are at 6%.

Spread

This is a cost or charge by the insurance company against the consumer returns. If there was a 3% spread on the above returns, the consumer would net 3%.

Why it may not mean much

Let’s say that of the myriad of products, you find one that offers great opportunities . Oops- because here is the crux to all contracts (at least as far as I can determine)- the companies can change the spreads or the caps, or the participation rates at their whim. You have no idea how to gauge most anything because you have no idea what will happen later on.

No idea at all.

After over a decade of seeing market gyrations, bond returns drop, risks going up and so on, I still believe pretty much the same in terms of the ultimate returns noted above and the odds of receiving them.

So research these as much as you want but I also caution this: you will find statistics for certain contracts that indicate one type of index or allocations will do better than others. True. But the time period to review such numbers (basically a decade) is far too short for any viable trend.

So why do these still do so well for sales? Because the agents do not understand the very, very convoluted contracts nor how they will really work. The consumers are totally clueless. So they end up being sold a long term bond return that is generally being masqueraded as a potential stock market return.

So there you have it. Will this short but very concise commentary make a difference?

Probably not.

But there is absolutely one thing that can deter fraudulent- or more likely- incompetent sales. If an agent does not have and nor can use a personal financial calculator, never buy anything from them. They simply do not know how money works.

It does NOT mean one who can use one is perfect, but at least they may understand a little of what is going on.

More information can be found online at http://EFMOODY.COM

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