What’s not to like about indexed annuities? After all, one who buys an indexed annuity has the promise of an insurer that he or she won’t lose money, and, sometimes, that there will be no less than a slight yearly gain.
Even a slight gain might be heady stuff, given the last investment decade, right?
At any rate, I finally figured it out. What bothers me about indexed annuities is the fact that the insurance company holds all the cards. What do I mean? Here’s a short list:
• Whatever index is used is without dividends. With the S&P 500, dividends are about 40% of the total gain over time.
• The insurer gets to set the conditions — if there is a cap, the maximum percentage gain, it is set by the insurance company. So, if the cap is, say, 8%, the most one can make is 8%, even if the S&P returns 20%.
• And, speaking of conditions, there is probably a participation limit. If so, it says that the owner may only earn, say, 70% of the capped return. So, if the cap is 8% and the participation limit is 70%, the most one can earn in that year is 5.6%, right?
I’m not suggesting that all indexed annuities are bad, just that — as I said — the house, the insurance company, always has the deck stacked in its favor.
Indexed vs. investment annuities
If one compares an indexed annuity with an investment annuity, such as a variable annuity from AXA, Prudential, Allianz, Sun Life Financial, Jackson National, Pacific Life, Nationwide, Lincoln Financial or another worthy company, the investment annuity buyer holds a good hand, too. That seems reasonable, doesn’t it? Both the issuing company and the buyer have good protection.
Let’s say the buyer invests 100% in the S&P 500 — if so, he or she receives 100% of the return, including dividends. Remember that dividends can be up to 40% of the total return. There’s no cap and no participation limit. And, yes, there can be a living or income benefit. If the S&P does 20%, the owner gets 20%, less the mortality and expense charges. Because investment and indexed annuities share these charges, let’s say the net return is 17%.
So, for purposes of the earlier example, the indexed annuity buyer got 5.6% — without subtracting any charges — and the investment annuity buyer was rewarded with 17% after expenses.
Aha! But what of the guaranteed cash? No question. The indexed annuity wins on a cash-in-hand basis in bad markets, unless, of course, the investment annuity performs, in which case it becomes the winner.
Many buy (or are sold) each type of annuity on the basis of lifetime income, either for one person or for a husband and wife. A modern investment annuity is impressive at delivering an income benefit amount, which, in no way, is related to cash.
Did you know that an 18-year-old could buy an annuity that pays no less than 4% yearly and no more than 8% every year for life? So, if the 18-year-old wins the lottery, that investment annuity might be the answer, yes? The formula is the 10-year treasury rate plus 1.5%. Yes, the income could begin right away, and, for life, it would never be less than 4% or more than 8% yearly. That one is from AXA Equitable. Try Jay Kaplan for info; he’s at (972) 608-9984.
How about an income based on the highest daily value in your annuity each market day? Prudential looks back at each anniversary, finds the highest daily value for an average year’s 252 market days and compounds the highest daily value at 5%. How about them apples? Try John McSwain at (214) 762-9495.
How about an investment annuity that, when income begins, grows it by 2.5% each and every year? It’s fantastic for IRAs. For this one, phone (214) 280-9506 and visit with Chris Ratterree, CFP.
And there is Lincoln Financial’s patented i4Life, which offers features and tax benefits found in single-premium immediate annuities and packages them in an investment income program — for this annuity benefit, dial Ian Mitchell at (918) 407-4426.
Allianz has its rockhopper, a little fellow who can increase your income even if you’ve got less in your annuity, after taking income, than when you started. Let’s say you start with $100,000, take income for years and, one day, have only $30,000 left. If you get an increase from that point, so that the $30,000 grows to a higher amount, you may earn an increase. For Allianz, phone (479) 966-6699 and chat with Eric Crowley.
And what about Nationwide? How about 10% simple interest yearly for up to 10 years? That’s the growth rate for its income benefit. If that rings your bell, pick up one of Mr. Bell’s instruments and dial Ryan Weyrauch (pronounced Y-rock) at (316) 218-2154.
Ohio National — Shawn Martin, (918) 504-8936) — offers a sound income benefit and a wide array of investment choices. And Jackson National has excellent sub-accounts and income benefits. Call Steve Beck at (405) 315-3158. I should also mention Pacific Life — it has some killer investment choices and a simple, inexpensive approach to income. Try David Murphy at (314) 623-9043.
(Disclosure: The phone numbers in this column are for my regional wholesalers. They may not be your regional wholesalers, but, by golly, they will know the name and number of your territory’s guy or gal, and — just think — they’ll get phone calls from all over to perk up their day. Go ahead; use my name.)
I’m willing to pay attention — honest. If you know of an indexed annuity that produces income benefits to match the ones discussed here, please write and tell me about it, okay?
This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, one may receive more or less than originally invested.