Response to Motley Fool's negative position on fixed index annuities
Dear Motley Fool,
I sometimes read your column in my local paper and have come to realize that you know nothing about insurance products. It’s the same old story: Brokers hate insurance products because they aren’t licensed by the life insurance department to handle life insurance products.
You write that the FINRA and the Securities and Exchange Commission have issued advisories about equity index annuities due to high hidden fees and other problems.
First of all, there is no such thing as equity index annuities. You and your cronies at the SEC tried to get them classified as securities so we couldn’t sell them unless we got a securities license via Rule 151A. I guess we were taking too much business away from you. The rule was thrown out by the courts and legislation. When you tried to ram through the regulation several years ago, the name of the product was changed to fixed index annuities to better reflect what they are, fixed annuities that are tied to an index (such as the S&P 500) to give the annuity interest credits that have the potential to be higher than the fixed annuity.
You say that fixed index annuities have hidden fees. That is not true. I have never seen a fixed index annuity that has a fee. Can you name one?
You say that there is a participation rate that will lower your gain. I work with six of the top carriers and all of them have 100 percent participation on the index.
You say that there are caps that limit any growth to a predetermined point. Obviously, you don’t know how these products work. When a client buys an annuity, the insurance company takes that money and buys bonds. These bonds pay interest, which the insurance company uses to buy a call option on the S&P Index a year from now.Because the bonds don’t make very much money in this environment, the insurance company cannot buy 100 percent of the upside of the index; they buy whatever they can afford to buy. If the market goes up, they take that gain up to the cap. If the market goes down, the option expires, worthless.
You write that annuities exclude dividend returns from the rate on which they base your payments. Well, options do not pay dividends.
You also claim that annuities lock up your money, making it inaccessible to you for many years, with early withdrawal penalties. There is a penalty for early withdrawal because the insurance company has to buy bonds that are not readily liquid; however, all of the annuities that I handle have a 10 percent penalty free amount each year after the first. Most have a terminal illness waver, as well as a nursing home waiver. You say that the annuities are not FDIC insured and if the insurance company fails, you may be out of luck. Of course they are not FDIC insured, they are licensed and regulated by the states and the states have a guarantee fund that protects clients. I have never heard of anyone losing a dime on a fixed of fixed index annuity up to the guaranteed amount.
You also wrote that those who purchase annuities forgo the now favorable tax rate for long-term gains. Any gain in an annuity is taxed as ordinary income. Well, at least you have some income with the annuity, unlike the stock market that remains about where it was 12 years ago.
You concluded that there are many kinds of annuities, and equity index annuities seem to serve those who are selling them more than those who buy them. I think the client is getting a far better deal than I am. They are able to move to safety, get some of the market gain, take out 10 percent of their accumulated amount each year if they need it, and if they don’t, they can let it grow tax-deferred.
When they are ready to retire, they can turn their annuity into lifetime income for them or their spouse to give them security that they will not outlive their income, and they can leave a legacy to their loved ones as a beneficiary without going through probate. All of that, and they don’t have to pay some broker an asset management fee every year, regardless of whether their account value goes up or down.
I have enjoyed reading your articles over the years, but maybe you should stick with securities, something that you seem to know much more about.