Comments on: Fixed-Income Investing: A Cheaper, Safer Alternative to Equity Indexed Annuities

By: Retirement Investing: How Bear Markets Can Help Your Retirement Planning

Retirement Investing: How Bear Markets Can Help Your Retirement Planning — Wed, 04 Feb 2009 12:22:49 +0000

[...] Money Morning: Fixed-Income Investing: A Cheaper, Safer Alternative to Equity Indexed Annuities [...]

By: M.Forgach

M.Forgach — Tue, 03 Feb 2009 21:06:08 +0000

Your ignorance about these products is amazing for someone who purports to be a financial professional. I sell these and without question every client is extremely happy they were in these. They have made a good return and not lost a penny as many investors have. I now question anything you write if you can make so many errors.

By: Mark

Mark — Tue, 03 Feb 2009 15:14:06 +0000

I would like to respond to the EIA comments made above and in fairness to all reading, I am an investment professional but my comments will not fall completely in line with others in the same field. I think that the plethora of financial products that exist, exist for more than only the purpose of making money for someone (hopefully, the client, the company, and the person selling the investment, I lean more toward the client). Different investment product types exist because different people feel differently about risk and that will never change. You are right about SOME EIA’s being complicated. Personally, the only EIA I sell (by choice) allows for 100% participation, decent caps, lower commissions, no fees charged to the client, and a short, 5-year surrender charge. I always recommend that clients considering a purchase look primarily at the annual reset versus some of the other exotic methods that are out there, which in my opinion are for show only, the majority of the time don’t outperform the easy-to-understand annual reset, and most of the time, the person selling the other more complicated methods, can’t explain them properly. I personally have been selling more variable annuities with living benefits guarantees rather than alot of EIA’s lately. True these are not right for everyone either but at least it takes away the argument that if the markets truly do take off in a mighty way, you do have the same upside potential that mutual funds have while still protecting your income. I want my clients to sleep well and feel comfortable with where there money is. Every investment is right for somebody, but no investment is right for everybody. Do the right thing for the client, and this discussion is basically a moog point.

By: Robert Head

Robert Head — Tue, 03 Feb 2009 15:09:18 +0000

You might want to elaborate on the “associated fees and charges”. And while you’re at it, why don’t you elaborate on the power of zero aspect which allows for annual resets on certain index annuity products. Futhermore, why in the world would you want to invest in a 7 year cd right now with the prospect of significantly higher rates? Your analysis has serious flaws. You might want to entertain a little more due diligence!

By: Jutia Group - Market Jitters & Political Critters

Jutia Group - Market Jitters & Political Critters — Tue, 03 Feb 2009 15:04:04 +0000

[...] Keith Fitz-Gerald Money Morning addthis_pub = ‘jutiagroup’; addthis_logo = ‘http://www.jutiagroup.com/favicon.ico’; addthis_brand [...]

By: Dennis Grothaus

Dennis Grothaus — Tue, 03 Feb 2009 14:35:53 +0000

I am so disappointed in your article in EIA’s. You have mislead your readers and it is so inaccurate. You are not comparing apples to apples. It is true EIA’s have outperformed the S&P market since their inception. But you are wrong to make the assumption that had they been available for 63 years they would not have outperformed. How can you make that statement when they did not exist so you have no way of knowing what interest rate caps would have been available. My EIA has no fees, provides a 10% penalty free withdrawal each year while it is in its surrender schedule of 6 -10 years, which is a key benefit and something a CD does not provide. It provides tax deferral which a CD does not provide (unless you hold a CD inside an IRA, which again is not an apples to apples comparison. And just as beneficial and important for an EIA or any annuity, which you fail to mention is the lifetime guaranteed income the EIA provides. My EIA provides this income and I do not have to ‘annuitize ‘ my EIA to get this income stream guarantee. Even after income distributions start, I can still take a 100% lump sum per whatever balance is left. The EIA I have has averaged 8.4% average returns historically and it was never presented as a stock market securities product. It is just a way to peg the interst rate to an index, usually earning a much better rate than what one can get in a traditional CD over time. In fact it has a 1 year minimum guaranteed interest rate in the fixed account which is better than most 1 year CD rates. Each year, I have the option of moving any money from this fixed rate bucket back into the bucket where the interst rate earned is indexed to the S&P, a smart thing to do if we are in a bull market. It is a win-win situation for a conservative investor.
Based on your comment about FDIC insurance, it seems you have been sucked into the same lie banks have been promoting for years. First, FDIC insurance requires banks only keep a very small percentage of their deposits available, something like 1%. They loan the rest out to people who can not afford their McMansions, forclose, etc. The banks were so greedy many did not even due their due diligence and verify a loan applicants employment before approving these mortgages. Insurance regulations require insurance company’s keep 100% on reserve, dollar for dollar. If they fall below these requirements, the State Department of Insurance steps in until the requirements are met. I have seen banks go under and just because there is FDIC insurance does not mean an investor will get his or her money back right away. Typically, when a bank fails, the depositors can easily wait a year before they get all their money back from the FDIC. Let’s not forget it was the banks that failed in the great depression and it was the insurance companies that bailed them out, not the US Government. FDIC did not exist yet. Note the key words in FDIC is “Insurance and Corporation.” FDIC is not the US Government. I find it interesting that what is backing the deposits in the bank is an insurance company and you seem to infer banks are safer than the insurance companies. Also, the economic mess we are in now was once again brought on by the greedy banks and their mismanagement, not insurance companies. I feel much safer investing with a good insurance company any day than a bank.

By: Gerry Kurth

Gerry Kurth — Tue, 03 Feb 2009 14:15:43 +0000

The comment is hawking a book and the second one is a well written, but biased and retrospective view of an investment environment where EIA’s would have fared well. Hardly a scientific, forward looking financial analysis. Sorry.

By: D Rinehart

D Rinehart — Tue, 03 Feb 2009 14:03:04 +0000

It amazes me when people write an article about indexed annuities that they act surprised that the upside potential is limited??? These are fixed annuities. The index link offers the potential for slightly higher return in a SAFE MONEY vehicle. Why would anyone expect all the upside with complete protection from downside risk???? (risk vs. reward) You are of course are entitled to your option, but in a period of time with tremendous market losses and bonds at historical highs, your advise seems quite bias. No one that owns a indexed annuity and “stayed the course”, to use an investment buzz word, has lost a dime! Forget the minimum guarantees… Zero is your hero in this environment. Why don’t you ask your readers how many of them would, if the could, go back to Jan 2008 and lock in a 0% return for the year? By the way, the potential for future interest crediting is reset at policy anniversary on most policies, meaning that when the market does turn, the buyer can realize gains as the market grows back to higher levels. Instead of recouping previous losses they will see gains.

These products are not for every saver, but offer tremendous benefits for long term, safe money retirement planning.

By: Gerry Kurth

Gerry Kurth — Tue, 03 Feb 2009 13:22:52 +0000

Excellent article on indexed annuities! I have several comments:

Crediting methods – The crediting methods used to allow the insurance companies to hedge the equity positions consist of spreads, participation rates and caps. Fair enough. The problem is that they reserve the right to change those published caps at their sole discretion. It’s called “retroactivity.”

Impartial analysis – For an impartial and scientific analysis, there is a website (Personalyze.org) where individuals can use a free “EIAnalyzer.” This lets you view Credit Method Ratings information on approximately 600 EIA product profiles to confirm the value of the expected return presented by an advisor. It’s unclear how the insurance company discretionary changes are handled.

Taxes – The tax deferral is, in fact, a benefit of these contracts. On the other hand, all gains are taxed as ordinary income.

Maturity dates – Most annuities have a 5-10 year maturity, longer than common CD’s. However, unlike CD’s, they usually allow a 10% annual withdrawal.

Licensing requiremets – For many unspophisticated investors, the ability to “get a guaranteed minimum rate of return, and the ability to capture the upside of the next bull market with no risk of loss” is too good to pass up. Many buy these products from zealous salesman who are offered up to 10% commissions without the knowledge to ask about the fine print. For that reason, the SEC has just decreed that these products will be regulated by the SEC, rather than the more lenient insurance commissions.

The move is the latest attempt by regulators to curb fraudulent sales to senior citizens. The major push started last year when the SEC conducted a joint-sweep of so-called free lunch seminars that targeted seniors for investments. Since then, the regulators have stepped up their rule making efforts as well as their enforcement actions to protect those nvestors.

Undoubtedly, there are several products out there whicjh offer a fair business proposition, but too many are geared to generate revenue for the insurance componies.

Gerry Kurth, Ph.D.
GPK111@HOTMAIL.COM

By: robert zimmerman

robert zimmerman — Tue, 03 Feb 2009 12:34:13 +0000

In my book, I make a similar comparison to yours: I call it the ‘racetrack’ annuity.

You are right – these babies are complicated to explain, and I believe there will be a lot of disenchanted buyers in the future.

However, there are many redeeming features of insurance contracts, not limited to the tax aspects. If you would like a complimentary copy of my book, let me know.