At NAFA we appreciate your interest in following a variety of products, including indexed annuities. The “hook” of your article focuses on one particular sale, as an example of the supposed broader ills of the industry. We would like to offer a more balanced perspective to the conversation.
Most financial professionals agree that consumers over 80 should have a large portion of their money in products that promise to protect savings. These consumers do not have time to recover from the recent catastrophic falls of the market. Fixed indexed annuities guarantee owners will not lose their money during an economic crisis, and they also provide opportunities for an income that cannot be outlived. A portfolio of stocks does not offer guarantees. It is this basic, but important, difference that explains why indexed annuities are not intended to match an index’s performance.
For many older Americans, top financial priorities include safety, earning an attractive interest rate consistent with that safety, and the opportunity for sustainable lifetime withdrawals without exhausting one’s nest egg. The fixed indexed annuity addresses these priorities and provides peace of mind.
There is no way to provide these benefits without limiting liquidity to some degree. Surrender charges allow insurance companies to maximize benefits and reward those who keep their annuity while only charging those who terminate early. State laws and suitability standards require that annuity owners have liquid funds available to provide for emergencies and unexpected expenses. Some of this liquidity is available through free partial withdrawal features, in addition to waivers of surrender charges in the event of nursing home confinement, terminal illness, and more.
Every annuity contract is different. Some have four-year surrender charge periods, while others have 10-year periods. Some offer premium bonuses while others do not. Some annuities offer more partial liquidity during the surrender charge period than others. As with anything financial, however, there is no “free lunch.” Each annuity contract provision that falls on the “richer” side of the benefit spectrum has a cost. A bonus in a contract might require more/longer surrender charges, for example. However it’s constructed; note that every bit of the contract structure and its sales process is both heavily regulated and supervised.
The United States is at the precipice of a retirement crisis. A portion of our country has income needs that cannot be met through systematic withdrawals via traditional savings. Millions of Americans lost a great portion of their savings in the recent economic crisis. Annuities and the guaranteed income they provide have the potential to maximize retirement income, offering a flotation device for retirees who might otherwise ‘drown’ financially. With this in mind, we would hope that journalists would choose to help retirees to understand all retirement products, including their opportunities and limitations. One of the most beneficial features of the internet is that people can find balanced information and educate themselves on retirement products, providing a strong foundation for making wise decisions for their futures. We recommend www.fixedannuityfacts.org and www.indexedannuityinsights.org as excellent resources on annuities, for use by both consumers and the media.
Just like all financial products, we encourage consumers to do their homework, understand all the terms and, based on their own circumstances decide what is best for them. There are many products in the market that can help you prepare for retirement. The Indexed Annuity Leadership Council recognizes that a balance of products along the risk spectrum, including Indexed Annuities meet many American’s retirement planning needs.
Indexed annuities are insurance products, and comparing their potential returns to those of stocks is apples to oranges. Negative market experience can come at the most inopportune time – when consumers do not have the ability or capacity to wait for the market recovery just to get back to even. Indexed annuity buyers purchase insurance as protection from fluctuations in market value and can use these products as guaranteed income for life.
As far as agent action and sales practices, strict suitability rules established by the NAIC, and required insurance company compliance, are designed to ensure indexed annuities are sold fairly and ethically to consumers. These requirements were designed to mirror the Financial Industry Regulatory Authority’s (FINRA) suitability standards for investment products and in fact, have additional standards of training, education and insurance company suitability review.