Annuities With An S& P Return
Sunday, April 30, 2006
To the insurance industry, equity-indexed annuities are a Goldilocks product: not too risky and not too safe. They are long-term investments that safeguard principal, guarantee a minimum rate of return and also offer investors some upside if the stock market does well.
To critics, these annuities are unnecessarily complicated, high-fee investments that line the pockets of insurance professionals at the expense of investors who don't understand what they are buying.
"They are the biggest fraud on earth," said Craig McCann, a consultant and former Securities and Exchange Commission economist. He calculates that virtually all investors would get better returns with equal safety by putting 60 percent of their money in U.S. Treasury bonds and the rest in a stock-index mutual fund.
But Gary Hughes, executive vice president of the American Council of Life Insurers, disagrees. "With the baby boomers retiring without much in terms of secure income, this is the kind of product they should be considering," he said.
No matter what your perspective, one thing is clear. Equity-indexed annuities have become incredibly popular in recent years, as investors have sought safe alternatives to the stock market and low-paying certificates of deposit.
These annuities are structured as insurance products, so they grow on a tax-deferred basis, guarantee a minimum rate of return and have a lock-up period in which the money can't be removed unless you pay a penalty. What makes them different from an ordinary fixed annuity is that there's a potential upside -- investors also receive a share of the return of the Standard & Poor's 500-stock index.
Sales have risen every year since their introduction in late 1995 and have nearly doubled since 2003, to $27.2 billion, according Advantage Compendium, a research firm that studies the industry. While still small potatoes compared with the $9 trillion mutual fund industry, equity-indexed annuities have begun to draw attention from securities and insurance regulators as well as consumer advocates.
They are concerned for two main reasons. Indexed annuities charge higher commissions than most stock and bond investments -- on average nearly 7 percent of the investment and as high as 13 percent in one extreme case. The lock-up periods are often quite long -- on average 10 years, and as much as 18 years -- which can be problematic for investors who suddenly need their money.
The securities regulators also worry that investors don't know that they aren't getting the same level of regulatory protection they do when they buy mutual funds and variable annuities. Unlike brokers who sell securities products, in most states, the agents who sell indexed annuities do not have to certify that the products are "suitable" for their customers.
On Friday, securities and insurance regulators will gather with industry representatives and consumer advocates at the National Press Club for a roundtable on the issue and try to come up with more uniform rules.
"We see very different levels of investor protection on products that look, to investors, to be very similar. We think of this as an effort to level the playing field," said Robert Glauber, chairman of NASD, the securities industry regulator that is co-sponsoring the gathering with the Minnesota Department of Commerce. One-third of all indexed annuities are sold by Minnesota-based Allianz Life Insurance of North America.
Insurance industry officials say they think much of the concern about equity-indexed annuities is misplaced. Although the product often has the name "equity" in the title and its return is linked to the stock market, it's not a true securities product because buyers are guaranteed the return of their principal plus a minimum level of interest, they say. Therefore, they argue, these annuities should be viewed and regulated as insurance, where the seller, not the buyer, absorbs most of the risk and is compensated for it.