The Power of the Deferred Annuity

Originally, annuities were used as a source of personally providing a guaranteed income. Today most people who buy an annuity never plan on “annuitizing” their contract, but intend on maintaining their annuity in a “deferred” status. With most deferred annuities, there is not a requirement to ever annuitize the contract. If the owner needs access to some of their funds, they may do so with a contractual provision to make periodic withdrawals. Some companies even provide the convenience of checkbook access for this benefit. Up to a contractually specified amount, withdrawals are without cost or penalty. Surrender charges only apply during a stated surrender period of the contract, and then only on amounts withdrawn in excess of the “free withdrawal” amount. If an owner utilizes the free withdrawal privileges of a deferred annuity, usually in the range of up to 10% per year, they can enjoy significant flexibility and control in the management of their money to provide regular retirement income, or money set aside for special or emergency uses. Deferred annuity contracts are usually structured to earn significantly higher returns than most guaranteed bank products. Unlike an annuitized contract, that ends upon the death of the owner, or after a limited fixed period of time, in a deferred contract, the entire unused account balance remaining at the death of the owner is easily and quickly passed on to the named beneficiaries, without passing through probate.

Are Annuities Filling the Void Left by Lack of Pension Plans?

In January 1981 the birth of the 401(k) began to change the face of retirement planning forever. Since that time, the traditional pension plans, with their guaranteed income options, have all but disappeared. In their place, the individual has now become responsible for driving their retirement savings through a company sponsored 401(k) plan and any other means personally available. While most 401(k) plans may include some company matching funds, still, in order to qualify for any company input, it requires that the first contribution be made by the participant. And within these plans, the worker never has a growing guarantee of retirement income, based upon years of service, but has an account balance with a limited number of investment choices. At retirement this nest egg, whatever size it has become, is then to be managed by the individual in a way to make it last for the rest of their life. When a retiree rolls their 401(k) into a personally managed IRA account, and then purchases an annuity within that IRA, they have the opportunity to restore a number of the guarantees that pension plans used to offer, such as guaranteed lifetime income. They can even provide that their surviving spouse or beneficiaries will be able to maintain this IRA account in a tax favored manner after their death. Perhaps the enormous public interest in fixed annuities, which includes indexed annuities, is partially a desire to return some of those lost assurances our grandparents' pension plans provided. If the individual is now the driving force behind their own retirement, we need to make sure that they can maintain these familiar and guaranteed options that only annuities provide.

The Majority of Investors are Flying Blind

In a National Underwriter's article recently, some surprising results were listed from a survey to determine how well informed the typical investor is about his investments. The Securities Investor Protection Corp., Washington, and the Investor Protection Trust, also from Washington, conducted the survey in November of this year among 927 U.S. investors. Some of the more interesting statistics were that only 61% of the participants understand that stock brokers and financial planners receive commissions on product sales. A whopping 64% of those surveyed had not bothered to check into the disciplinary backgrounds of their stockbrokers or financial planners and 61% of this group who did not do background investigation chose not to do so because they trusted the individual. Another 9% did not check out their broker or advisor because the advisor assured them that there was nothing for them to be concerned about. One of the more shocking numbers is that only 8% of participants understand that their portfolio is not insured from investment fraud. And finally, one number that is not surprising is that only 58% of the respondents had ever read a prospectus. With the recent uproar by the securities industry about the lack of proper sales methods used with indexed annuities, it seems that these figures show that there is much work they need to be doing in their own house, in order to improve their own sales methods for securities products to better inform and protect their own investor clients.

NASD Twists Definition of "Risk" to Attack Indexed Annuities

One of the complaints about Indexed Annuities, that has the NASD and others in the securities industry clamoring for control of the sale of these products, is in their suggestion that indexed annuities carry similar risk to variable annuities and other securities. In an article from the NASD web site posted July 30, 2005, entitled Equity Indexed Annuities-A Complex Choice, they indicate that since the return on an indexed annuity varies, the indexed annuity carries some risk, but less risk than a variable annuity. Taking a quote from approved study material, published by the Securities Training Corporation, used in preparation for the test to become series 7 registered, the definition of "risk" is "the potential for loss of an investment due to many factors including, inflation, interest rates, default, politics, foreign exchange, call provisions, etc." The missing fact that EVERY argument AGAINST indexed annuities fails to include is that the principal of an indexed annuity is not subject to loss from those factors and therefore, indexed annuities do not carry market risk. If you apply the correct definition of "risk" to securities, such as variable annuities, mutual funds, stocks, and even bonds, you quickly understand that the value of the original investment CAN and DOES go down due to fluctuations in market conditions. In an indexed annuity, however, the worse that can happen in a declining market is no growth and no interest credits for that period, but the principal value is contractually guaranteed, as well as, in most cases, all previously credited interest. Simply put, risk involves loss of value, the very negative characteristic of securities that indexed annuities were designed to overcome, and that is what has made them so appropriate and so appealing to millions of retirees.

Securities are Investment Opportunities, Indexed Annuities are Contracts

When someone buys an investment, they are purchasing an opportunity. Neither the broker, the mutual fund, the company in which they are buying stock, the NASD, nor any other entity, offer them any promises, no guarantees, nor any certainty of how that opportunity will ultimately pan out. If you buy a security, you do not get anything in writing that tells you what your investment will be worth at ANY point in the future. In fact, the only performance information that a broker is even allowed to give you is a review of past performances. When someone buys a fixed or indexed annuity, however, quite different from an investment, they are not buying an opportunity; they are purchasing a contract from an insurance company. In essence, they are exchanging their sum of money, for a specific set of benefits, clearly detailed in a written contract. ALL of the guaranteed provisions of that contract are not dependant upon the performance of the stock market, but are backed by the financial strength of the issuing insurance company. Within the pages of an indexed annuity contract, the purchaser is provided with a list of the guaranteed minimum values of their contract for any given year, for the life of the contract. The owner of an indexed annuity assumes NO MARKET RISK and has no potential for market conditions to devalue his contract. With the unique methods used within indexed annuities, in order to determine interval interest credits, the owner simply has the potential to earn a greater interest than the guaranteed minimum, when the linked index increases, but is contractually protected from a reduction in his contract value, when the index goes down.

Securities Industry Attacks on EIAs Are Rooted in Finanacial Jealousy

When the stock market began its slide in 2000, investors were routinely looking for alternate ways of preserving and protecting their assets from further losses, and thus the sale of indexed annuities began increasing at a record pace. This flow of money, from brokerage accounts, into these fixed insurance products, was so dramatic, that it quickly got the attention of the NASD and the broker dealers, who were losing hundreds of millions in commissions, and tens of billions in assets under management. In 2004, the sale of indexed annuities grew to a whopping $23 billion, up 64% from the previous year. With the loss of so much business, so suddenly, into one single competitive product, the securities industry decided to respond with a vengeance, but not with new and innovative products, in order to effectively compete with indexed annuities. Rather, the securities industry chose to start a methodical propaganda campaign against indexed annuities. The NASD Notice to Members 05-50, attempts to force registered agents, who want to sell non-registered indexed annuities, to only use their broker dealers to access a short list of “approved” indexed annuities. This action clearly exposes their true intentions of trying to return all of that lost commission money to their broker dealers and registered agents, by ultimately garnering complete control of this rapidly growing market sector. In spite of the questions you may have heard raised by the NASD, about questionable sales methods and the suitability of indexed annuities in certain markets, their real concern is not about the sales process, it is about the money!

NASD Has Created the Indexed Annuity Identity Crisis

At a conference in Boca Raton, Florida, sponsored by the Securities Industry Association, New York, Robert Glauber, chairman of the NASD, stated that equity indexed annuities are "subject to utterly ambiguous regulation because it isn't entirely clear to anyone whether they're insurance products or securities." This must come as a complete surprise to the 50 state insurance commissioners, who are completely clear about their state appointed responsibility and authority over the approval, marketing, and sale of indexed annuities by the licensed insurance agents in their state. With only a few exceptions, indexed annuities ARE fixed annuities, a category of insurance products Mr. Glauber correctly admits are subject to state insurance commissioners' regulation. But the NASD is muddying the public perception about the true nature and identity of indexed annuities, in their efforts to mount a propaganda campaign, in an attempt to get the SEC to transfer control and regulation of these products from the insurance departments, into their arena, for reasons which we will discuss in the future. While Mr. Glauber is apparantly confused about whether indexed annuities are insurance or securities products, the SEC and the insurance departments are not confused, and unless and until there is some official change in that definition and ruling, this kind of verbal attack against indexed annuities is uncalled for, and this interference and criticism, by the NASD into the business of the insurance industry, is completely out of line.

NASD Head Needs a Lesson in Etiquette

The NASD chairman, Robert Glauber, recently stated, regarding indexed annuities, that, "I think what we need to do here is invite the state insurance regulators to work with us on harmonizing and clarifying the rules for fixed and equity-indexed annuities sales." Since fixed and equity indexed annuities are not under the jurisdiction of the NASD, but are completely under the authority of each state insurance department, Mr. Glauber is doing some party crashing here. If the insurance deparments wanted to invite the NASD to help them with fixed and equity indexed annuities, then it is their party to offer the invites, not the other way around. But so far, I don't think the insurance departments are interested in Mr. Glauber, or any of his securities industry associates in attending. So, why aren't the insurance commissioners at least a little offended by Mr. Glauber's remarks? Where is the uproar from the insurance departments of each state that have been so cleverly insulted by these remarks?