Indexed Annuities are NOTHING like Variable Annuities

Because both variable and indexed annuities have the term “annuity” contained within their names, they have been linked as similar, but the differences between the two are like night and day. Typically, a variable annuity has NO guarantee of principal so it can and does lose value, but quite the opposite, the principal in indexed annuities is guaranteed never to lose value. Gains within variable annuities fluctuate widely, and losses of principal and previous earnings are gone and must be earned back each time the market swings; but in an indexed annuity, interest credits have a minimum guarantee over the life of the contract, and the extra interest credits earned by increases in the linked index are periodically “locked in” after which they can never be lost. Variable annuities have enormous fees deducted from the principal account value each year, regardless of whether the account experiences gains or losses; but in an indexed annuity no fees are EVER deducted from the account value itself, but only paid by a slight reduction in the extra interest credits in positive years only. This method of “sharing” gains, within an indexed annuity is not that unlike the way “no load” mutual funds, the darlings of the do-it-yourself securities investors and fee-for-service financial planners, deduct their hidden fees off the top from a portion of the overall gains. Both variable and indexed annuities have surrender charges for a stated period of time, but these fees are only imposed if the annuity is liquidated entirely, or in an amount exceeding the allowed annual free withdrawal. But considering that in a downswing of the market, the account value in a variable annuity could also be lower than the starting value, the impact of surrender charges imposed in a variable product only compounds those losses. In an indexed annuity the worse case scenario in any type of market is a flat year with no growth. All annuities have been given tax favored status by the IRS in that all earnings within an annuity are tax deferred. But the exchange imposed by the IRS for that valuable benefit is a 10% penalty for withdrawal prior to age 59 1/2, similar to any other retirement savings vehicle. This makes annuities excellent long term retirement savings instruments for someone of any age. With the ability to defer withdrawals indefinitely, and when taking money from an annuity does become necessary, using either their generous free withdrawal privileges or their unique ability to convert the account to a guaranteed income stream that cannot be outlived, annuities are also the perfect distribution vehicles to use once retirement is reached. Any question of suitability raised by the NASD about replacing a variable annuity with an indexed annuity is simply another part of their deceptive propaganda campaign to get control of these incredibly powerful financial products.

Replacing Variable Annuity with Indexed Annuity is an Exercise in Safety

The NASD would have the public accept that indexed annuities are the same as variable annuities, not because they really believe this to be true, but because the NASD currently has partial jurisdictional control over variable annuities, but no authority at all over indexed annuities. This attempt to blur the line between these two products is all part of a methodical propaganda campaign being waged by the NASD to wrestle control of indexed annuities from state insurance departments. Interestingly enough, contrary to the accusations of the NASD about owner complaints and agent improprieties, indexed annuities actually have fewer complaints registered with the NAIC than any other annuity or insurance product, and of the complaints filed; none include allegations of failure of their indexed annuity to perform as expected. Unfortunately the same cannot be said about variable annuities, where numerous complaints have been filed with a number of regulatory agencies, and in one instance, the issuing company has not only pulled their variable product from the market, they are settling a class action lawsuit with the existing policy holders. So, when the NASD cites replacement of variable annuities with indexed annuities as a basis for their fears of lack of suitability, exactly what is the real concern? When an indexed annuity moves the policy holder from a position of risk they had with a variable product, to a position of guarantees and safety available with the indexed annuity, unless the client needs to remain exposed to potential losses, an indexed annuity will ALWAYS be more suitable, especially with the older clients who need to reduce or remove their exposure to market risk. But the differences are so dramatic; we will take time in the following post to examine some key distinctions between variable annuities and indexed annuities.

NASD Completely Out of Line With EIA Webcast

The NASD is now taking on the task of trying to teach its members, in minute detail, about EIAs through the use of a Webcast, presented with all the enthusiasm and energy of a dead fish. But aside from the lifeless way this material on their site is presented, it is wrong of the NASD to even address this topic for two major reasons. First, the NASD does not have ANY regulatory authority over EIAs and therefore has neither the responsibility to educate their registered reps about them, nor the RIGHT to discuss them with such detail, as if they did. I wonder how the NASD would like it if insurance departments, suddenly began to discuss and attempt to educate registered insurance agents about securities products in the same manner the NASD has been forcing their way into talking about the sale of annuities. The SEC is SO controlling when it comes to the regulation of securities, and the NASD, as the self-regulatory body for registered reps, is even more reactionary to any variance from an extremely well defined set of rules and regulations that govern the sale of every securities product. So how is it that the pubic figure heads for this same organization keep illegally calling indexed annuities investments, when a registered representative of the same organization is forbidden by law to call any non-security product an investment? The second reason, this web posting about EIAs by the NASD is out of line, is that they attempt to summarize and explain ALL of the variations of EIA product designs at once. Imagine them trying to explain ALL of the variations of every mutual fund, including all the differences in fees, internal design, and investment objectives, in a single 7 ½ minute video. It is no more necessary that a client understand every possible EIA available in order to make an informed decision about buying one, than it would be for a client to fully comprehend every single mutual fund available before choosing to buy one of them. Part of the agent’s job is to sift through the enormous number of offerings in either of these product lines, and then present the client one or two best matches, based upon their ethical professional judgment and their evaluation of suitability based upon the stated financial objectives of the client. For mutual funds, the broker dealers, the mutual fund companies, and the NASD should be the ones that provide the educational information the agent needs in order to do their job properly. Similarly, the insurance companies, GAs or FMOs, and the state insurance departments, and NOT the NASD are the ones who should be doing all the educating for licensed insurance agents about the details of indexed annuities. And the fact that SOME insurance agents offering EIAs may also be registered reps does NOT give the NASD ANY right or responsibility to intrude into the business of EIAs, any more than then insurance departments have a right to intrude into the business of securities products because an insurance agent is also a registered rep.